PART
I
Background
Global
Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was initially organized for the
purpose of investing in real estate related to the long-term care industry. Intentionally, in 2019 the Company’s focus began
to shift from leasing long-term care facilities to third-party, independent operators towards an owner operator model, where wholly-owned
subsidiaries will operate these facilities. As a result, the Company no longer intended to elect to qualify as a REIT and is in
the process of gaining approval for a name change and other charter provision changes to better reflect its current business model.
In 2020, the Company adopted an assumed tradename “Selectis Health, Inc.” and intends to formally change its name
to that moniker at the next annual meeting of shareholders.
Prior
to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos,
Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the
split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (“WPF”).
WPF was merged into the Company in 2019.
We
acquire, develop, lease, manage and dispose of healthcare real estate, provide financing to healthcare providers, and provide
healthcare operations through our wholly-owned subsidiaries. Our portfolio is comprised of investments in the following three
healthcare segments: (i) senior housing (including independent and assisted living), (ii) post-acute/skilled nursing, and (iii)
bonds securing senior housing communities. We will make investments within our healthcare segments using the following six investment
products: (i) direct ownership of properties, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management,
(v) the Housing and Economic Recovery Act of 2008 (“RIDEA”), which represents investments in senior housing operations
utilizing the structure permitted by RIDEA and (xi) owning healthcare operations.
The
delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to
maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to
the following:
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Compelling
demographics driving the demand for healthcare services;
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Specialized
nature of healthcare real estate investing; and
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Ongoing
consolidation of a fragmented healthcare real estate sector.
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Healthcare
Industry
Healthcare
is the single largest industry in the U.S. based on Gross Domestic Product (“GDP”). According to the National Health
Expenditures report by the Centers for Medicare and Medicaid Services (“CMS”): (i) national health expenditures are
expected to grow 1.2 percentage points faster than GDP per year over the 2016 – 2025 period; (ii) the average compounded
annual growth rate for national health expenditures, over the projection period of 2016 through 2027, is anticipated to be 5.6%;
and (iii) health spending is projected to represent 19.9% of US GDP by 2025, up from 17.8% in 2015.
Senior
citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 85-year and older segment
of the population spends 92% more on healthcare than the 65 to 84-year-old segment and over 329% more than the population average.
In
the future, the Company intends to continue to search for operations that will enhance our portfolio of healthcare centers.
Real
Estate Industry
The
delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to
maintain and grow their businesses.
The
Company owns 13 healthcare facilities. Initially, the Company simply owned the physical property and real estate and leased or
subleased the facility to third-party operators. In 2019, the Company intentionally decided to begin moving towards operations.
In the future, the Company intends to own and operate all future facilities.
Business
Strategy
Our
primary goal is to increase shareholder value through profitable growth and conscious care at our operations. Our investment strategy
to achieve this goal is based on three principles: (i) quality healthcare for our residents, (ii) opportunistic investing, (iii)
portfolio diversification and (iv) conservative financing.
Quality
Healthcare for our Residents
Our
healthcare operations continue to bolster our revenue. Over the last two years, our operational footprint has grown from one facility
to five. The mix of our revenues, from leasing facilities to our owner operator model has shifted drastically from rents to healthcare,
as well. To ensure this continues our operational teams and staff at our facilities is dedicated to maintaining the highest of
standards, and quality care metrics in line with, but not limited to, the CDC, ADA, CMS, and all state and local guidelines.
Opportunistic
Investing
We
will make investment decisions that are expected to drive profitable growth and create shareholder value. We will perform in depth
due diligence and quantitative and qualitative analyses to ensure that we position ourselves to create and take advantage of situations
to meet our goals and investment criteria that will continue to add to the Company’s strategic and financial value.
Portfolio
Diversification
We
believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant, and investment
product. Diversification reduces the likelihood that a single event would materially harm our business and allows us to take advantage
of opportunities in different markets based on individual market dynamics. While pursuing this strategy of diversification, we
will monitor, but will not limit, our investments based on the percentage of our total assets that may be invested in any one
property type, investment product, geographic location, the number of properties which we may lease to a single operator or tenant,
or mortgage loans we may make to a single borrower. With investments in multiple segments and investment products, we can focus
on opportunities with the most attractive risk/reward profile for the portfolio. We may structure transactions as master leases,
require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters of credit
or security deposits, and take other measures to mitigate risk.
Financing
We
will strive to manage our debt-to-equity levels and maintain multiple sources of liquidity, access to capital markets and secured
debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets.
Our debt obligations will be primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates
on our operations.
We
plan to finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may arrange
for short-term borrowings from banks or other sources. We may also arrange for longer-term financing through offerings of equity
and debt securities, placement of mortgage debt and capital from other institutional lenders and equity investors.
Competition
Investing
in real estate serving the healthcare industry is highly competitive. We will face competition from REITs, investment companies,
private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers, and other institutional
investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more
challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may
also be impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital,
construction and renovation costs, existing laws and regulations, new legislation, and population trends.
Income
from our facilities is dependent on the ability of our operations and tenants to compete with other healthcare companies on a
number of different levels, including: the quality of care provided, reputation, the physical appearance of a facility, price
and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral
sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants
and operators. Private, federal, and state payment programs as well as the effect of laws and regulations may also have
a significant influence on the profitability of our tenants and operators.
Healthcare
Segments
Post-acute/skilled
nursing. Skilled Nursing Facilities (“SNF”) offer restorative, rehabilitative and custodial nursing care for people
not requiring the more extensive and sophisticated treatment available at hospitals. Ancillary revenues and revenues from sub-acute
care services are derived from providing services to residents beyond room and board and include occupational, physical, speech,
respiratory and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales
of pharmaceutical products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis.
Post-acute/skilled
nursing services provided by our operations and tenants in these facilities will be primarily paid for either by private sources
or through the Medicare and Medicaid programs.
Independent
Living Facilities (“ILFs”). ILFs are designed to meet the needs of seniors who choose to live in an environment
surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance
with activities of daily living (“ADL”), such as bathing, eating, and dressing. However, residents have the option
to contract for these services.
Senior
housing. Senior housing facilities include assisted living facilities (“ALFs”), independent living facilities
(“ILFs”) and continuing care retirement communities (“CCRCs”), which cater to different segments of the
elderly population based upon their needs. Services provided by our operators or tenants in these facilities are primarily paid
for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid
and Medicare. Senior housing property types are further described below.
Assisted
Living Facilities. ALFs are licensed care facilities that provide personal care services, support, and housing for
those who need help with activities of daily living yet require limited medical care. The programs and services may include transportation,
social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions,
meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings
with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance
for residents with Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local
regulations.
Continuing
Care Retirement Communities (“CCRCs”). CCRCs provide housing and health-related services under long-term
contracts. This alternative is appealing to residents as it eliminates the need for relocating when health and medical needs change,
thus allowing residents to “age in place.” Some CCRCs require a substantial entry or buy-in fee and most also charge
monthly maintenance fees in exchange for a living unit, meals, and some health services. CCRCs typically require the individual
to be in relatively good health and independent upon entry.
Investments
Direct
Ownership. We plan to primarily generate revenue by purchasing properties and operating the facilities internally. Most of
our revenue will be received from government agencies, hospice companies, managed care contracts and private pay receipts that
will provide for a substantial recovery of operating expenses including but not limited to staffing, supplies, bed taxes, real
estate taxes, repairs and maintenance, utilities, and insurance. For existing properties with leases in place, our rents will
be received from leases under triple net leases.
Operating
properties. We may enter contracts with healthcare operators to manage communities that are placed in a structure permitted
by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”). Additionally, as an owner operator,
our local teams work to create alignment with our internal health care providers to scale operating efficiencies, and/or ancillary
services to drive profitable growth.
Our
ability to grow income from our properties depends, in part, on our ability to (i) increase revenue and other earned income by
increasing occupancy levels and improving rates, (ii) manage bad debt and (iii) control operating expenses. For properties under
lease, most of our leases will include contractual annual base rent escalation clauses that are either predetermined fixed increases
and/or are a function of an inflation index.
Debt
investments. Our mezzanine loans will generally be secured by a pledge of ownership interests of an entity or entities, which
directly or indirectly own properties, and are subordinate to more senior debt, including mortgages and more senior mezzanine
loans. Our interest in mortgages and construction financing will typically be issued by federal, state, and/or local banks and
will generally be secured by healthcare real estate.
Developments
and redevelopments. We will generally commit to development projects that are at least 50% pre-leased or when we believe that
market conditions will support speculative construction. We will work closely with our local real estate service providers, including
brokerage, property management, project management and construction management companies to assist us in evaluating development
proposals and completing developments. Our development and redevelopment investments will likely be in the life science and medical
office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition
cost or existing basis) to achieve property stabilization or to change the primary use of the properties.
Recent
Financings
2018
Senior Secured Note Offering
In
October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited
investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, and Warrant for each $1.00 in principal
amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price of $0.50 per share. The Company
and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000 in Notes and Warrants.
The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600. The Offering also included the
exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants which the Company had previously
sold in the 2016 and 2017 Senior Note Offerings for Units in the Offering. In 2019, an additional $100,000 was exchanged. No proceeds
were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. As a result of the exchanges
since the offering began, only $25,000 of 10% Senior Secured Notes due on December 31, 2018 remain outstanding as of December
31, 2020, as all other previously outstanding senior notes have been exchanged for new 11% Senior Secured Notes due in 2021.
On
January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering
of 11% Senior Secured Notes. The total amount of the Offering has been increased to $2,500,000 and the offering period will continue
until terminated by the Board of Directors. Effective February 5, 2020 and March 3, 2020, the Company completed the sale of $60,000
and $100,000, respectively, of Units in the Offering. The sale of $100,000 Units on March 3, 2020 was to a related party. Effective
October 31, 2020 the Company completed the exchange of $150,000 of Units in the Offering for matured Senior Unsecured Notes.
No fees or commissions were paid on the sale of the Units. The proceeds were used for general working capital.
COVID-19
Pandemic
In
December 2019, a novel strain of coronavirus (“COVID-19”) emerged in China. On March 11, 2020, the World Health Organization
declared the outbreak of COVID-19 a pandemic. The outbreak has now spread to the United States and infections have been reported
globally.
Starting
in March 2020, the COVID-19 pandemic, and measures to prevent its spread began to affect us in a number of ways. In our operating
portfolio, occupancy trended lower in the second half of the month as government policies and implementation of infection control
best practices began to materially limit or close communities to new resident move-ins. In addition, starting in mid-March, operating
costs began to rise materially, including for services, labor and personal protective equipment and other supplies, as our operators
took appropriate actions to protect residents and caregivers. These trends accelerated in April and May, and are expected to continue
through at least June 2021, impacting revenues and net operating income.
The
Centers for Disease Control & Prevention (“CDC”) will provide final confirmation of the cases. The Company is
engaging in aggressive mitigation efforts in accordance with CDC and state Department of Health guidelines to protect the health
and safety of residents while respecting their rights. Employees at all of our facilities are taking several precautions as they
care for residents, including, among other things, monitoring themselves for symptoms upon leaving and returning home, and upon
arriving at and leaving the skilled nursing facility. They are also wearing masks and other personal protective equipment while
caring for residents. Additionally, as of the date of this Report, none of our third-party operators have reported any occurrences
of COVID-19 in any of the buildings they are managing. Our operators have also reported to us that they currently have adequate
supply levels, including appropriate quantities of Personal Protective Equipment (PPE) for staff. Additionally, as of the date
of filing, the Company has received no additional information.
The
federal government, as well as state and local governments, have implemented or announced programs to provide financial and other
support to businesses affected by the COVID-19 pandemic, some of which benefit or could benefit our company, tenants, operators,
borrowers, and managers. While these government assistance programs are not expected to fully offset the negative financial
impact of the pandemic, and there can be no assurance that these programs will continue or the extent to which they will be expanded,
we are monitoring them closely and have been in active dialogue with our tenants, operators, borrowers, and managers regarding
ways in which these programs could benefit them or us.
The
COVID-19 pandemic is rapidly evolving. The information in this Report is based on data currently available to us and will likely
change as the pandemic progresses. As COVID-19 continues to spread throughout areas in which we operate, we believe the outbreak
has the potential to have a material negative impact on our operating results and financial condition. The extent of the impact
of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread
of the outbreak, impact on our operators, employees and vendors, and impact on the facilities we manage, all of which are uncertain
and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating
results, and financial condition.
We
expect the trends highlighted above with respect to the impact of the COVID-19 pandemic to continue and, in some cases, accelerate.
The extent of the COVID-19 pandemic’s continued effect on our operational and financial performance will depend on future
developments, including the duration, spread and intensity of the outbreak, the pace at which jurisdictions across the country
re-open and restrictions begin to lift, the availability of government financial support to our business, tenants, and
operators and whether a resurgence of the outbreak occurs. Due to these uncertainties, we are not able at this time to estimate
the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and cash flows but it
could be material.
PPP
and CARES Act
In
April and May of 2020, we applied for and were approved for an aggregate of $1,610,169 in Paycheck Protection Program (“PPP”)
loans issued by the SBA. As a result of newly adopted amendments to the PPP program, 60% of the PPP loan amount must be expended
on payroll in the 24 week-period following the loan date. On November 19, 2020, the Company received notice of forgiveness
of the entire balance on two of its three loans obtained through the PPP (the “PPP Loans”) of the CARES Act. The forgiveness
included principal of $324,442 and $710,752, as well as interest payable of $1,794 and $3,869. The Company has applied for forgiveness
on the remaining $574,975 principal and interest payable of $4,017, was approved by our Lender, and is awaiting final forgiveness
from the SBA.
Government
Regulations, Licensing and Enforcement
Overview
Our
operations, and tenants will typically be subject to extensive and complex federal, state and local healthcare laws and regulations
relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing
the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased
regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services,
among others. These regulations are wide-ranging and can subject our tenants and our operations to civil, criminal, and administrative
sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory
environment because of a relative lack of guidance in many areas as certain of our healthcare properties will be subject to oversight
from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement
enforcement activity and regulatory non-compliance by our tenants and operations can all have a significant effect on the financial
condition of the property, which in turn may adversely impact us.
We
will seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our operations and tenants
by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operations base to limit
our exposure to any single entity, and seeking tenants and operations that are not largely dependent on Medicaid reimbursement
for their revenues. In addition, we ensure in each instance that our operators have obtained all necessary licenses and permits
before beginning operations and require that those operators covenant that they will comply with all applicable laws and regulations
in connection with the facility operations.
The
following is a discussion of certain laws and regulations generally applicable to our operations and tenants.
Fraud
and Abuse Enforcement
There
are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements
and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts,
which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare,
Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including
the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or
recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as
the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate
family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things,
the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws,
including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide
for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal,
and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid
reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced
by a variety of federal, state, and local agencies and can also be enforced by private litigants through, among other things,
federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many
of our operations and tenants are subject to these laws, and some of them may in the future become the subject of governmental
enforcement actions if they fail to comply with applicable laws.
Reimbursement
Sources
of revenue for many of our tenants and operations will include, among other sources, governmental healthcare programs, such as
the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and HMOs. As
federal and state governments focus on healthcare reform initiatives, and as many states face significant budget deficits, efforts
to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain
services provided by some of our tenants and operations.
Healthcare
Licensure and Certificate of Need
Certain
healthcare facilities in our portfolio will be subject to extensive federal, state, and local licensure, certification
and inspection laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies,
handle radioactive materials, and operate equipment. Many states require certain healthcare providers to obtain a certificate
of need, which requires prior approval for the construction, expansion, and closure of certain healthcare facilities. The
approval process related to state certificate of need laws may impact some of our tenants’ and our ability to expand or
operative effectively.
Americans
with Disabilities Act (the “ADA”)
Our
properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations”
as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with
the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons
with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that
may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one,
and we continue to assess our properties and make modifications as appropriate in this respect.
Environmental
Matters
A
wide variety of federal, state, and local environmental and occupational health and safety laws and regulations affect
healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations,
many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly
impact us. Under various federal, state, and local environmental laws, ordinances and regulations, an owner of real property
or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under
or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including
government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines
or personal or property damages and the owner’s or secured lender’s liability therefore could exceed or impair the
value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the
failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such
property or to borrow using such property as collateral which, in turn, could reduce our revenues.
Taxation
Federal
Income Tax Considerations
The
following summary of the taxation of the Company and the material federal tax consequences to the holders of our debt and equity
securities is for general information only and is not tax advice. This summary does not address all aspects of taxation that may
be relevant to certain types of holders of stock or securities (including, but not limited to, insurance companies, tax-exempt
entities, financial institutions or broker-dealers, persons holding shares of common stock as part of a hedging, integrated conversion,
or constructive sale transaction or a straddle, traders in securities that use a mark-to-market method of accounting for their
securities, investors in pass-through entities and foreign corporations and persons who are not citizens or residents of the United
States).
This
summary does not discuss all the aspects of U.S. federal income taxation that may be relevant to you considering your particular
investment or other circumstances. In addition, this summary does not discuss any state or local income taxation or foreign income
taxation or other tax consequences. This summary is based on current U.S. federal income tax law. Subsequent developments in U.S.
federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have
a material effect on the U.S. federal income tax consequences of purchasing, owning, and disposing of our securities as set forth
in this summary. Before you purchase our securities, you should consult your own tax advisor regarding the U.S. federal, state,
local, foreign, and other tax consequences of acquiring, owning, and selling our securities.
On
March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, which requires U.S. stockholders
who meet certain requirements and are individuals, estates, or certain trusts to pay an additional 3.8% tax on, among other things,
dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012.
U.S. stockholders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition
of shares of our stock.
Health
Care Regulatory Climate
The
Centers for Medicare & Medicaid Services (“CMS”) annually updates Medicare skilled nursing facility prospective
payment system rates and other policies. On July 30, 2019, CMS issued its final fiscal year 2020 Medicare skilled nursing facility
update. Under the final rule, CMS projects aggregate payments to skilled nursing facilities will increase by $851 million, or
2.4%, for fiscal year 2020 compared with fiscal year 2019. The final rule also addresses implementation of the new Patient-Driven
Payment Model case mix classification system that became effective on October 1, 2019, changes to the group therapy definition
in the skilled nursing facility setting, and various skilled nursing facility Value-Based Purchasing and quality reporting program
policies. On April 10, 2020, CMS issued a proposed rule to update skilled nursing facility rates and policies for fiscal year
2021, which starts October 1, 2020. CMS estimates that payments to skilled nursing facilities would increase by $784 million,
or 2.3%, for fiscal year 2021 compared to fiscal year 2020. CMS also proposes to revise the geographic wage index and apply a
cap on wage index decreases used in setting skilled nursing facility rates. The proposal would also make changes to the patient
classifications under the Patient Driven Payment Model and certain minor policy changes to the Value-Based Purchasing program.
Those rules were finalized in October 2020.
On
July 18, 2019, CMS published a final rule that eliminates the prohibition on pre-dispute binding arbitration agreements between
long-term care facilities and their residents. The rule also strengthens the transparency of arbitration agreements and makes
other changes to arbitration requirements for long-term care facilities. There can be no assurance that these rules or future
regulations modifying Medicare skilled nursing facility payment rates or other requirements for Medicare and/or Medicaid participation
will not have an adverse effect on the financial condition of our borrowers and lessees which could, in turn, adversely impact
the timing or level of their payments to us.
Since
the announcement of the COVID-19 pandemic and beginning as of March 13, 2020, CMS has issued numerous temporary regulatory waivers
and new rules to assist health care providers, including skilled nursing facilities, respond to the COVID-19 pandemic. These include,
waiving the skilled nursing facility’s 3-day qualifying inpatient hospital stay requirement, flexibility in calculating
a new Medicare benefit period, waiving timing for completing functional assessments, waiving requirements for health care professional
licensure, survey and certification, provider enrollment, and reimbursement for services performed by telehealth, among many others.
CMS also announced a temporary expansion of its Accelerated and Advance Payment Program to allow skilled nursing facilities and
certain other Medicare providers to request accelerated or advance payments in an amount up to 100% of the Medicare Part A payments
they received from October–December 2019; this expansion was suspended April 26, 2020 in light of other CARES Act funding
relief. In addition, CMS has also enhanced requirements for nursing facilities to report COVID-19 infections to local, state,
and federal authorities.
On
March 26, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
sweeping legislation intended to bolster the nation’s response to the COVID-19 pandemic. In addition to offering economic
relief to individuals and impacted businesses, the law expands coverage of COVID-19 testing and preventative services, addresses
health care workforce needs, eases restrictions on telehealth services during the crisis, and increases Medicare regulatory flexibility,
among many other provisions. Notably, the CARES Act temporarily suspends the 2% across-the-board “sequestration” reduction
during the period May 1, 2020 through December 31, 2020, and extends the current Medicare sequester requirement through fiscal
year 2030. In addition, the law provides $100 billion in grants to eligible health care providers for health care related expenses
or lost revenues that are attributable to COVID-19. On April 10, 2020, CMS announced the distribution of $30 billion in funds
to Medicare providers based upon their 2019 Medicare fee for service revenues. Eligible providers must agree to certain terms
and conditions in receiving these grants. In addition, the Department of Health and Human Services (“HHS”) has authorized
$20 billion of additional funding for providers that have already received funds from the initial distribution of $30 billion.
Unlike the first round of funds, which came automatically, providers have to apply for these additional funds and submit the required
supporting documentation, using the online portal provided by HHS. Providers must attest to and agree to specific terms and conditions
for the use of such funds. HHS will make the additional distributions with the goal of allocating the whole $50 billion proportionally
across all providers based on those providers’ proportional share of 2018 net Medicare fee-for-service revenue. CMS is expected
to distribute additional funding to Medicaid and potentially other providers, but the details are not yet known.
Congress
periodically considers legislation revising Medicare and Medicaid policies, including legislation that could have the impact of
reducing Medicare reimbursement for skilled nursing facilities and other Medicare providers, limiting state Medicaid funding allotments,
encouraging home and community-based long-term care services as an alternative to institutional settings, or otherwise reforming
payment policy for post-acute care services. Congress continues to consider further legislative action in response to the COVID-19
pandemic. There can be no assurances that enacted or future legislation will not have an adverse impact on the financial condition
of our lessees and borrowers, which subsequently could materially adversely impact our company.
On
December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 which provides approximately $900 billion
in COVID-19 relief aid. The Act includes an expansion of the PPP program, as well as many other provisions that may have a direct
or indirect impact on health care providers like our company.
Additional
reforms affecting the payment for and availability of health care services have been proposed at the federal and state level and
adopted by certain states. Increasingly, state Medicaid programs are providing coverage through managed care programs under contracts
with private health plans, which is intended to decrease state Medicaid costs. State Medicaid budgets may experience shortfalls
due to increased costs in addressing the COVID-19 pandemic. Congress and state legislatures can be expected to continue to review
and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing
laws, or changes in payment methodologies may have a dramatic effect on the definition of permissible or impermissible activities,
the relative costs associated with doing business and the amount of reimbursement by the government and other third-party payors.
EMPLOYEES
As
of December 31, 2020, the Company and its subsidiaries had 287 employees. The Company also engages the services of consultants
from time to time, some of which may be provided by affiliates of the Company at no cost.
The
COVID-19 pandemic has subjected our business, operations, and financial condition to several risks, including, but not limited
to, those discussed below:
●
|
Risks
Related to Revenue: The revenues from our operations and from our tenants are dependent on occupancy. All facilities must
maintain a minimum viable resident count to ensure costs do not exceed revenues. In addition to the impact of increases in
mortality rates on occupancy of our operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants
and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to
heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy
of our operating and triple-net properties could further decrease. Such a decrease could affect the net operating income of
our operating properties and the ability of our triple-net operators to make contractual payments to us.
|
|
|
●
|
Risks
Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator
payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant and operator, bankruptcy, or insolvency
due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health
and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating
lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies,
the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant,
operator, in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent
in the case of a lease. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited
by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance)
to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property
to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant;
however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects
of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant because of the COVID-19 pandemic or for
other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about
the operator’s financial condition and insolvency proceedings, particularly considering ongoing publicity related to
the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should
such events occur, our revenue and operating cash flow may be adversely affected.
|
|
|
●
|
Risks
Related to Operations: Across all of our properties, our operations and our tenants have incurred increased operational
costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations,
as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including
increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf
of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or
the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the
unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult
conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay,
such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those
of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or
tenants’ contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties,
employees, and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities
could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of
the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain
claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants
of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges
and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the
movement of people.
|
●
|
Risks
Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the
COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions
of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results,
may be limited. We have a significant development portfolio and have not experienced significant delays or disruptions but
may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term
competitive position.
|
|
|
●
|
Risks
Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has
had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of
volatility or a downturn in the financial markets could result in increased cost of capital. If our access to capital is restricted
or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations
and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition
and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there
can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost
of capital, liquidity, competitive position, and access to capital markets.
|
The
events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize
or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results,
cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating
and financial results, it may also have the effect of heightening many of the other risks described in this Report.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not
applicable.
As
of December 31, 2020, we owned thirteen long-term care facilities including a campus of three buildings in Tulsa, OK. The following
table provides summary information regarding these facilities at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Total
Square Feet
|
|
|
#
of Beds
|
|
|
|
|
State
|
|
Properties
|
|
|
Operations
|
|
|
Leased
Operations
|
|
|
Operating
Square Feet
|
|
|
Leased
Square Feet
|
|
|
Operating
Beds
|
|
|
Leased
Beds
|
|
|
Average
Occupancy
|
|
Arkansas
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
40,737
|
|
|
|
-
|
|
|
|
141
|
|
|
|
74
|
%
|
Georgia
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
|
|
31,747
|
|
|
|
92,649
|
|
|
|
211
|
|
|
|
181
|
|
|
|
80
|
%
|
Ohio
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
27,500
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
Oklahoma
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
|
|
131,037
|
|
|
|
31,939
|
|
|
|
417
|
|
|
|
-
|
|
|
|
52
|
%
|
Total
|
|
|
13
|
|
|
|
7
|
|
|
|
6
|
|
|
|
162,784
|
|
|
|
192,825
|
|
|
|
628
|
|
|
|
422
|
|
|
|
60
|
%
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
From
time to time in the ordinary course of business, we may become subject to legal proceedings, claims, or disputes. We are or were
a party to the following pending legal proceedings.
Bailey
v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In
April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal
injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this
date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry,
it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing,
as landlord, as required by the operating lease.
As
we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the
operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend
to assert.
While
it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Thomas
v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This
action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April
2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general
liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure.
The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood
of a material adverse result is remote.
Edwards
Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of
Oklahoma, Case No. CJ-19-5883.
This
action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing
the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement
and Release with the Receiver and an Operations Transfer Agreement pursuant to which out newly formed subsidiary will acquire
the assets and operations of the facility. While awaiting Court approval of those two agreements, we have been completing extensive
remodeling of the facility.
Dodge
NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.
This
action was brought by us against the former lease operator for numerous violations of the operating lease, including violation
of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also
served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to
us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019,
the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary
Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility.
This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes
between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions,
LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer
Agreement with the Company, which Motion was granted. On July 2, 2020, the court approved the Operations Transfer Agreement (“OTA”)
from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. Nearly simultaneously Global Eastman, LLC secured
an operating license from the state with an effective date of July 1, 2020. Pursuant to the terms of the OTA, Global Eastman has
assumed all operations associated with the prior operator, and the matter is essentially resolved in all material respects.
Village
of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.
This
is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients)
at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not
Guilty. We are the landlord and do not believe we have any liability in this matter. The action was subsequently dismissed without
prejudice.
Cadence
Healthcare Solutions, LLC.
We
received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”)
claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager
that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the
manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this
claim and intend to defend vigorously. We believe the likelihood of a material adverse outcome is remote.
Oliphant
v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This
is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare &
Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary
Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the
Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was
made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge
NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities
as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman
LLC was formed on November 21, 2019. We strongly deny any liability and intend to vigorously defend. We believe that the likelihood
of a material adverse outcome is remote.
In
the matter of Austin.
On
December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH,
LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside
of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former
boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator
who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable, and
as a result management of the Company believes that the likelihood of a material adverse outcome is remote.
In re: Providence HR, LLC v. CRM of
Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
In re: ALT/WARR, LLC v. CRM of Sparta,
LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
These are companion cases arising out of
the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta,
Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions
under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March
22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease
operators to comply with their leases, including payment of rent, pending the next hearing. A Status Conference is scheduled for
May 13, 2021.
ITEM
4.
|
MINE
SAFETY DISCLOSURES
|
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of the Business
Global
Healthcare REIT, Inc. (“Global” or “we” or the “Company”) was initially organized for the
purpose of investing in real estate related to the long-term care industry. In 2019, the Company’s focus began to shift
from leasing nursing home assets to independent operators toward owning and operating its real estate assets itself. As a result,
the Company no longer intends to elect to qualify as a REIT and is in the process of gaining approval for a name change and other
charter provisions to better reflect its current business model.
Prior
to the Company changing its name to Global Healthcare REIT, Inc. on September 30, 2013, the Company was known as Global Casinos,
Inc. Global Casinos, Inc. operated two gaming casinos which were split-off and sold on September 30, 2013. Simultaneous with the
split-off and sale of the gaming operations, the Company acquired West Paces Ferry Healthcare REIT, Inc. (WPF). WPF was merged
into the Company in 2019.
The
Company acquires, develops, leases, manages, and disposes of healthcare real estate, operates Skilled Nursing, Independent Living,
and Assisted Living facilities, and provides financing to healthcare providers.
Basis
of Presentation
The
accompanying consolidated financial statements (the Financial Statements) have been prepared in accordance with accounting principles
generally accepted in the United States (GAAP). The Company is the sole member of various consolidated limited liability companies
established to operate various acquired skilled nursing operations, senior living operations and related ancillary services. All
intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interests within
the equity section of its consolidated balance sheets and the amount of consolidated net income that is attributable to Global
Healthcare REIT, Inc. and the noncontrolling interest in its consolidated statements of operations.
The
consolidated financial statements include the accounts of all entities controlled by the Company through its ownership of a majority
voting interest.
Reclassifications
Certain
amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial
statements. These reclassifications had no effect on the previously reported net loss.
Use
of Estimates and Assumptions
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America (“U.S. GAAP” or “GAAP”) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates included
herein relate to the recoverability of assets, the purchase price allocation for properties acquired, and the fair value of certain
assets and liabilities. Actual results may differ from estimates.
Management’s
Liquidity Plans
On August 27, 2014, FASB issued ASU 2014-05,
Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern, which requires management to
assess a company’s ability to continue as a going concern within one year from financial statement issuance and to provide
related footnote disclosures in certain circumstances.
For the year ended December 31, 2019, the
Company disclosed that there was substantial doubt as to its ability to continue as a going concern as a result of net losses
incurred of $868,031 and its accumulated deficit. However, management believes that the Company’s ability to meet its obligations
for the next twelve months from the date these financial statements were issued has been alleviated due to, but not
limited to:
|
1.
|
Projected
cash flows from operations resulting from continued improvement of the Company’s operating performance. During the year
ended December 31, 2020, the Company recorded net income of $2,925,820 and generated positive cash flows from operations.
This resulted from the Company’s strategic decision
to focus on its healthcare operations and opportunities to expand and improve those operations. In 2020, the Company
opened three (3) additional facilities and in March of 2021 opened Park Place and is planning to acquire, or open one to
three additional facilities in 2021.
|
|
2.
|
Future
refinancing of existing debt. As of December 31, 2020, the Company has working a working
capital deficit of approximately $17 million due to approximately $20 million of mortgage
loans maturing in the 2021 fiscal year. Management is in discussion with all lenders,
and HUD to begin the refinancing of these notes to longer-term paper which will provide
more certainty for future loan payments.
|
The
focus on opportunities within our current portfolio and future properties to acquire and operate, the settlement, refinance, and
continued service of debt obligations, the potential funds generated from stock sales and other initiatives contributing
to additional working capital should alleviate any substantial doubt about the Company’s ability to continue as a
going concern as defined by ASU 2014-05. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the failure to do so could negatively
impact our future operations.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted
Cash
Restricted
cash consisted of the following as of December 31:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Funds
held in escrow under the terms of notes or bonds payable for purposes of paying future debt service costs
|
|
$
|
410,866
|
|
|
$
|
351,298
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
410,866
|
|
|
$
|
351,298
|
|
Concentration
of Credit Risk
The
Company maintains deposits in financial institutions that at times exceed the insured amount of $250,000 provided by the U.S.
Federal Deposit Insurance Corporation (FDIC). The excess amounts at December 31, 2020 and 2019 were $2,406,815 and
$108,356, respectively. The Company believes the financial institutions it uses are credit worthy and stable. The Company does
not believe that it is exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Property
and Equipment
In
accordance with purchase accounting guidance established for entities under common control, the property and equipment acquired
from entities under common control are stated at their carrying value on the date of acquisition. Property and equipment not acquired
from entities under common control is recorded at its estimated fair value. Estimated fair value is determined with the assistance
from independent valuation specialists using recent sales of similar assets, market conditions or projected cash flows of properties
using standard industry valuation techniques.
Upon
acquisition of real estate properties determined to be asset acquisitions, the Company determines the total purchase price of
each property and allocates the purchase price of acquired properties to net tangible and identified intangible assets based on
relative fair values. Fair value estimates are based on information obtained from independent appraisals, other market
data, and information obtained during due diligence period. Acquisition-related costs such as due diligence, legal and accounting
fees are included in the purchase price. Initial valuations are subject to change during the measurement period, but the
period ends as soon as the information is available. The measurement period shall not exceed one year from the date of acquisition.
Upon
acquisition of business entities and real estate determined to be a business combination, the Company identifies and recognizes
the net tangible and identified intangible assets based on fair values, and net assets as goodwill or gain on bargain purchase.
Fair value estimates are based on information obtained from independent appraisals, other market data, information obtained during
due diligence and information related to the marketing, leasing, and or operating at the specific property. Acquisition-related
costs such as due diligence, legal and accounting fees are expensed as incurred. Initial valuations are subject to change during
the measurement period, but the period ends as soon as the information is available. The measurement period shall not exceed one
year from the date of acquisition.
Any
subsequent betterments and improvements are stated at historical cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets, and tenant improvements are depreciated over the remaining term of the lease. Useful
lives of the assets are summarized as follows:
Land
Improvements
|
|
15
years
|
Buildings
and Improvements
|
|
30
years
|
Furniture,
Fixtures and Equipment
|
|
10
years
|
Impairment
of Long-Lived Assets
When
circumstances indicate the carrying value of property and equipment may not be recoverable, the Company reviews the property for
impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to
result from the property’s use and eventual disposition. This estimate considers factors such as expected future operating
income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition, and other
factors. If impairment exists, due to the inability to recover the carrying amount of the property, an impairment loss is recorded
to the extent that the carrying value exceeds the estimated fair value of the property and equipment. Estimated fair value is
determined with the assistance from independent valuation specialists using recent sales of similar assets, market conditions
or projected cash flows of the property using standard industry valuation techniques.
Notes
Receivable and Notes Receivable – Related Parties
The
Company evaluates its notes receivable for impairment when it is probable the payment of interest and principal will not be made
in accordance with the contractual terms of the note receivable agreements. Once a note has been determined to be impaired, it
is measured to establish the amount of the impairment, if any, based on the fair value, as determined by the present value of
expected future cash flows discounted at the note’s effective interest rate. If the fair value of the impaired note receivable
is less than the recorded investment in the note, a valuation allowance is recognized.
Deferred
Loan Costs and Debt Discounts
Deferred
loan costs are amortized over the life of the related loan using the straight-line method, which approximates the effective interest
method. For the years ended December 31, 2020 and 2019, deferred loan costs paid in cash totaled $57,184 and $8,885, respectively.
Amortization expense for the years ended December 31, 2020 and 2019 totaled $121,938 and $136,352, respectively. Deferred loan
cost amortization is included as a component of interest expense in the consolidated statements of operations.
Goodwill
Goodwill
represents the excess of the cost of an acquired business over the amounts assigned to its net assets. Goodwill is not amortized
but is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances change
that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or changes in circumstances
that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments
in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors.
The
Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it
is more likely than not that the fair value of the reporting unit is greater than it’s carrying amount, an impairment test
is unnecessary. If an impairment test is necessary, the Company will estimate the fair value of its related reporting units. If
the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is determined to be impaired,
and the Company will proceed with recording an impairment charge equal to the excess of the carrying value over the related
fair value.
The
Company has recorded Goodwill in connection with business acquisitions during each of the years ended December 31, 2020 and 2019
(see Note 10). During the years ended December 31, 2020 and 2019, the Company recorded no impairment of Goodwill.
Intangible
Assets
As
part of the acquisition of the operations at Southern Hills Rehab Center, LLC (“SHR”), the Company recognized certain
intangible assets related to the potential net income from the existing patients in the facility. The Company estimated the value
of these contracts to be $42,185 based on historical net revenues and census information provided by the seller. The asset was
depreciated on a straight-line basis over 47 days, starting from December 1, 2019. Accordingly, the Company recognized amortization
expense of $15,258 and $26,927 during the years ended December 31, 2020 and 2019, respectively, and the intangible asset was fully
depreciated as of December 31, 2020.
As
part of the acquisition of the operations at Global Eastman, the Company recognized certain intangible assets related to the potential
net income from the existing patients in the facility. The Company estimated the value of these contracts to be $19,013 based
on historical net revenues and census information provided by the seller. The asset was depreciated on a straight-line basis over
75 days, starting from July 1, 2020. Accordingly, the Company recognized amortization expense of $19,013 during the year ended
December 31, 2020 and the intangible asset was fully depreciated as of December 31, 2020.
Warrant
Liability
Warrants
to purchase the Company’s common stock with nonstandard antidilution provisions, regardless of the probability or likelihood
that may conditionally obligate the issuer to ultimately transfer assets, are classified as liabilities and are recorded at their
estimated fair value at each reporting period in accordance with ASC 815 “Derivatives and Hedging.” Any change in
fair value of these warrants during the reporting period is recorded as a component of Other (Income) Expense on the Company’s
Consolidated Statements of Operations.
Revenue
Recognition
The
Company’s leases may be subject to annual escalations of the minimum monthly rent required under each lease. The accompanying
consolidated financial statements reflect rental income on a straight-line basis over the term of each lease. Cumulative adjustments
associated with the straight-line rent requirement are reflected in Prepaid Expenses and Other in the consolidated balance sheets
and totaled $589,379 and $553,272 as of December 31, 2020 and 2019, respectively. Adjustments to reflect rental income on a straight-line
basis totaled $36,107 net increase to income and $112,035 net decrease to income for the years ended December 31, 2020 and 2019,
respectively.
Rent
receivables and unbilled deferred rent receivables are carried net of an allowance for uncollectible amounts. An allowance is
maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their
lease agreements. The Company also maintains an allowance for deferred rent lease receivables arising from the straight-line
recognition of rents. Such allowances are charged to net against rental incomes.
When
the lessee is the owner of any improvements, any lessee improvement allowance that is funded by the Company is treated as a lease
incentive and amortized as a reduction of revenue over the lease term. As of December 31, 2020, and 2019, there were no
deferred lease incentives recorded.
For
our healthcare operations, we recognize revenue in accordance with ASC 606 whereby we apply the following steps:
|
a.
|
Step
1: Identify the contract(s) with a customer
|
|
b.
|
Step
2: Identify the performance obligations in the contract
|
|
c.
|
Step
3: Determine the transaction price
|
|
d.
|
Step
4: Allocate the transaction price to the performance obligations in the contract
|
|
e.
|
Step
5: Recognize revenue when (or as) the entity satisfies a performance obligation
|
In
accordance with ASC 606, estimated uncollectable amounts due from patients are generally considered implicit price concessions
that are a direct reduction to net operating revenues.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) ASC 718,
“Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize
it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the
vesting period.
Effective
January 1, 2019, the Company adopted ASU No. 2018-07, Compensation – Stock Based Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which aligns accounting for share-based payments issued
to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes
previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.
The adoption of ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
Fair
Value Measurements
The
Company utilizes the methods of fair value measurement as described in ASC 820 to value its financial assets and liabilities.
As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability
in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used
to measure fair value into three broad levels, which are described below:
Level
1 – Quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level
2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level
3 – Inputs reflecting management’s best estimates and assumptions of what market participants would use in pricing
assets or liabilities at the measurement date. The inputs are unobservable in the market and significant to the valuation of the
instruments.
A
financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
The
Company has no financial assets or financial liabilities
that are required to be measured at fair value on a recurring basis as of December 31, 2020, and 2019.
The
carrying values of cash and cash equivalents, accounts payable, accrued liabilities and other short-term debt, approximate
their fair value because of the short-term nature of these financial instruments. The
carrying value of long-term debt approximates fair value since the related rates of interest approximate current market
rates.
Our consolidated balance sheets include
the following financial instruments: cash and cash equivalents, accounts receivable, notes receivable, restricted cash, accounts
payable, debt and lease security deposit. We consider the carrying values of our short-term financial instruments to approximate
fair value because they generally expose the Company to limited credit risk, because of the short period of time between origination
of the financial assets and liabilities and their expected settlement, or because of their proximity to acquisition date fair
values. The carrying value of debt approximates fair value based on borrowing rates currently available for debt of similar terms
and maturities.
Upon acquisition of real estate properties,
the Company determines the total purchase price of each property and allocates this price based on the fair value of the tangible
assets and intangible assets, if any, acquired and any liabilities assumed based on Level 3 inputs. These Level 3 inputs can include
comparable sales values, discount rates, and capitalization rates from a third-party appraisal or other market sources.
Income
Taxes
As
previously disclosed in the “Organization and Description of the Business” section of this Note, the Company’s
focus has partially shifted from leasing nursing home assets to independent operators toward owning and operating its real estate
assets itself. As a result, the Company no longer intends to elect to qualify as a REIT under applicable provisions of the Internal
Revenue Code.
The
Company uses the asset and liability method of accounting for income taxes. Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates resulting from new legislation is recognized in income in the
period of enactment. A valuation allowance is established against deferred tax assets when management concludes that the “more
likely than not” realization criteria has not been met. The Company recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained.
Income
(Loss) Per Common Share
Basic
earnings per share are based on the weighted-average number of shares of common stock outstanding. FASB ASC Topic 260, “Earnings
per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.
Diluted
earnings per share are based on the assumption that all dilutive options and warrants were converted or exercised by applying
the treasury stock method and that all convertible preferred stock were converted into common shares by applying the if-converted
method. Under the treasury stock method, options and warrants are assumed to be exercised at the beginning of the period or at
the time of issuance, if later, and as if funds obtained thereby were used to purchase common stock at the average market price
during the period. Under the if-converted method, the preferred dividends applicable to convertible preferred stock are added
back to the numerator. The convertible preferred stock is assumed to have been converted at the beginning of the period or at
time of issuance, if later, and the resulting common shares are included in the denominator.
We
calculate basic earnings per share by dividing net income attributable to common stockholders (the “numerator”) by
the weighted average number of common shares outstanding (the “denominator”) during the reporting period. Diluted
earnings per share is calculated similarly but reflects the potential impact of outstanding options, warrants and other commitments
to issue common stock, including shares issuable upon the conversion of convertible preferred stock outstanding, except where
the impact would be anti-dilutive.
The
following table sets forth the computation of basic and diluted earnings per share:
|
|
Year
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to Global Healthcare REIT, Inc.
|
|
$
|
2,955,820
|
|
|
$
|
(861,614
|
)
|
Series
D Preferred Dividends
|
|
|
(30,000
|
)
|
|
|
(30,000
|
)
|
Net
Income (Loss) Attributable to Common Stockholders – Basic
|
|
$
|
2,925,820
|
|
|
$
|
(891,614
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net Income(Loss)
Attributable to Common Stockholders
|
|
$
|
2,925,820
|
|
|
$
|
(891,614
|
)
|
Series
D Preferred Dividends
|
|
|
30,000
|
|
|
|
-
|
|
Net
Income (Loss) Attributable to Common Stockholders – Diluted
|
|
$
|
2,955,820
|
|
|
$
|
(891,614
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted Average
Common Shares Outstanding
|
|
|
27,247,531
|
|
|
|
27,282,385
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per
share:
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
27,247,531
|
|
|
|
27,282,385
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
Series D Convertible Preferred Stock
|
|
|
382,500
|
|
|
|
-
|
|
Weighted Average
Common Shares Outstanding - Diluted
|
|
|
27,630,031
|
|
|
|
27,282,385
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per Share Attributable
to Common Stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
(0.03
|
)
|
Options
to purchase 600,000 shares of common stock were outstanding during the year ended December 31, 2020 but were not included in the
computation of diluted earnings per share because they are anti-dilutive due to the options’ exercise price being greater
than the average market price of the common shares. Warrants to purchase 2,708,130 shares of common stock were outstanding during
the year ended December 31, 2020 but were not included in the computation of diluted earnings per share because they are anti-dilutive
due to the warrants’ exercise price being greater than the average market price of the common shares.
Comprehensive
Income
For
the periods presented, there were no differences between reported net income (loss) and comprehensive income (loss).
Recently
Issued Accounting Pronouncements
The
Financial Accounting Standards Board and other entities issued new or modifications to, or interpretations of, existing accounting
guidance during 2020. Management has carefully considered the new pronouncements that altered generally accepted accounting principles
and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial
position or operations in the near term.
2.
INVESTMENTS IN DEBT SECURITIES
At
December 31, 2020 and 2019, the Company held investments in marketable securities that were classified as held-to-maturity and
carried at amortized costs. Held-to-maturity securities consisted of the following:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
States and Municipalities
|
|
$
|
24,387
|
|
|
$
|
24,387
|
|
Contractual
maturity of held-to-maturity securities at December 31, 2020 is $24,387, all due in one year or less, and total
value of securities at their respective maturity dates is $24,387. The securities have technical defaults, but the Company still
considers the investments to be recoverable. Actual maturities may differ from contractual maturities because some borrowers have
the right to call or prepay obligations with or without call or prepayment penalties.
The
Company had net cash proceeds from the sale of investment in debt securities during 2019 of $151,141, a gain of $1,069 on sale
of investment in debt securities and used $12,353 cash in the purchase of investment in debt securities.
3.
PROPERTY AND EQUIPMENT
The
gross carrying amount and accumulated depreciation of the Company’s property and equipment as of December 31, 2020 and 2019
are as follows:
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,778,250
|
|
|
$
|
1,597,500
|
|
Land Improvements
|
|
|
242,000
|
|
|
|
242,000
|
|
Buildings and Improvements
|
|
|
40,612,330
|
|
|
|
38,362,127
|
|
Furniture, Fixtures and Equipment
|
|
|
2,123,418
|
|
|
|
1,707,925
|
|
Construction
in Progress
|
|
|
3,728,431
|
|
|
|
3,185,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,484,429
|
|
|
|
45,094,620
|
|
Less Accumulated Depreciation
|
|
|
(8,686,062
|
)
|
|
|
(7,140,033
|
)
|
Less Impairment
|
|
|
(1,560,000
|
)
|
|
|
(1,560,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,238,367
|
|
|
$
|
36,394,587
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense (excluding Intangible Assets)
|
|
$
|
1,546,029
|
|
|
$
|
1,324,883
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for
Capital Expenditures
|
|
$
|
985,681
|
|
|
$
|
1,668,867
|
|
4.
Notes receivable
Note
Receivable – Receiver for Healthcare Management of Oklahoma, LLC
The
Company purchased a $750,000 note from F&M Bank on August 6, 2019, as part of a Receivership certificate in our Southern Hills
SNF, for $694,609 paid to F&M bank and $55,391 paid to the Receiver. The maturity date of the note was February 7, 2018 and
causing the note to be in default. This purchase was made to facilitate the termination of the Receivership and transfer of the
HMO assets and operations, subject to the approval of the Oklahoma Department of Health, to Southern Hills Rehab Center, LLC,
a wholly-owned subsidiary of the Company. On December 1, 2019, this note receivable was written-off as consideration to the receiver
for acquisition of the assets and operations of Southern Hills Rehabilitation Center.
Note
Receivable: Accounts Receivable Line of Credit (“ARLOC”) – Infinity Health Interests, LLC
As
part of the transition to a new tenant at High Street Nursing facility, the Company committed a $250,000 Accounts Receivable Line
of Credit (“ARLOC”) to an affiliate of Infinity Health Interests, LLC (“Infinity”) in order to ensure
that no disruptions in management of the facility occur. The ARLOC is secured by a first lien on all the receivables of the facility
as well as a personal guarantee from the two principals of Infinity. As of December 31, 2018, the Company had loaned $106,334
to Infinity under this agreement and during the year ended December 31, 2019 loaned another $143,666 to bring the balance of the
ARLOC to $250,000. During the year ended December 31, 2019, the Company determined it was unlikely the amount due on the ARLOC
would be collected and wrote-off the balance, recording a bad debt expense of $250,000.
5.
DEBT AND DEBT – RELATED PARTIES
The
following is a summary of the Company’s debt and debt – related parties outstanding as of December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Senior Secured Promissory
Notes
|
|
$
|
1,695,000
|
|
|
$
|
1,485,000
|
|
Senior Unsecured Promissory Notes
|
|
|
-
|
|
|
|
300,000
|
|
Senior Secured Promissory Notes - Related
Parties
|
|
|
975,000
|
|
|
|
875,000
|
|
Fixed-Rate Mortgage Loans
|
|
|
30,370,220
|
|
|
|
22,427,949
|
|
Variable-Rate Mortgage Loans
|
|
|
5,650,579
|
|
|
|
4,618,006
|
|
Line of Credit, Senior Secured
|
|
|
-
|
|
|
|
7,230,582
|
|
Other Debt, Subordinated Secured
|
|
|
741,000
|
|
|
|
1,386,000
|
|
Other Debt, Subordinated Secured –
Related Parties
|
|
|
150,000
|
|
|
|
150,000
|
|
Other Debt, Subordinated
Secured – Seller Financing
|
|
|
125,394
|
|
|
|
-
|
|
|
|
|
39,707,193
|
|
|
|
38,472,537
|
|
|
|
|
|
|
|
|
|
|
Premium, Unamortized
Discount and Debt Issuance Costs
|
|
|
(455,827
|
)
|
|
|
(493,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,251,366
|
|
|
$
|
37,979,184
|
|
|
|
|
|
|
|
|
|
|
As presented in the Consolidated Balance
Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, Net
|
|
$
|
38,129,600
|
|
|
$
|
36,954,184
|
|
|
|
|
|
|
|
|
|
|
Debt - Related
Parties, Net
|
|
$
|
1,121,766
|
|
|
$
|
1,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,251,366
|
|
|
$
|
37,979,184
|
|
The
weighted average interest rate and term of our fixed rate debt are 5.49% and 6.8 years, respectively, as of December 31, 2020.
The weighted average interest rate and term of our variable rate debt are 5.89% and 17.1 years, respectively, as of December 31,
2020. We capitalized $5,177 of interest and fees related to the extension of senior notes during the year ended December 31, 2020.
Corporate
Senior and Senior Secured Promissory Notes
In
2017, $600,000 in notes were sold and issued, of which $425,000 were to related parties. On December 31, 2017, there were outstanding
an aggregate of $1.2 million in senior secured notes. The maturity date of all the senior secured notes was extended to December
31, 2018 prior to their original maturity date. For every $1.00 in principal amount of note, investors got one warrant exercisable
for one year to purchase an additional share of common stock at an exercise price of $0.75 per share. The warrants have a cashless
exercise provision and were valued using the Black-Scholes pricing model. The maturity date of the 1.2 million warrants issued
along with the notes was extended to December 31, 2018, 225,000 warrants of which occurred in 2018. As of December 31, 2019, the
Company had not renewed or repaid $125,000 in 10% notes with a maturity date of December 31, 2018, and those notes were technically
in default. Effective January 28, 2020, the Company exchanged $100,000 in outstanding senior secured 10% Notes and Warrants that
had matured on December 31, 2018 for 11% Senior Secured Promissory Notes and issued 100,000 cashless exercise warrants for purchase
of company stock at $0.50, expiring October 31, 2021. As of December 31, 2020, the Company had not renewed or repaid $25,000 in
10% notes with a maturity date of December 31, 2018. While this is technically in default, the Company continues to
make interest payments to the noteholder.
In
October 2017, the Company sold an aggregate of $300,000 in senior unsecured notes. The notes bear interest at the rate of 10%
per annum and were due in October 2020. For every $1.00 in principal amount of note, investors got one warrant exercisable for
one year to purchase an additional share of common stock at an exercise price of $0.75 per share. The warrants have a cashless
exercise provision. On September 30, 2020, the Company repaid $150,000 of 10% Senior Unsecured Notes that matured October
31, 2020. Effective October 31, 2020, the Company exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that
had matured on October 31, 2020 for 11% Senior Secured Promissory Notes and issued 150,000 cashless exercise warrants for purchase
of the Company’s common stock at $0.50 per share, expiring October 31, 2021.
In
October 2018, the Company, through a registered broker-dealer acting as Placement Agent, undertook a private offering to accredited
investors of Units, each Unit consisting of an 11% Senior Secured Note, due in three years, (October 31, 2021) and one Warrant
for each $1.00 in principal amount of Note exercisable for three years to purchase a share of Common Stock at an exercise price
of $0.50 per share. The Company and the Placement Agent completed the Offering in December 2018 having sold an aggregate of $1,160,000
in Notes and Warrants. The net proceeds to the Company were $1,092,400, after deducting Placement Agent fees of $67,600, and issued
111,000 warrants to the Placement Agent with $21,453 of the fair value of the warrants recorded as loan cost. The Offering also
included the exchange of an aggregate of $1.075 million in outstanding senior secured 10% Notes and Warrants for Units in the
Offering. No proceeds were realized from the exchange and no fees were paid to the Placement Agent for such exchanges. During
2018, among the $1.075 million senior secured notes that were extended to October 31, 2021 by virtue of the exchange, $875,000
were to related parties.
On
January 17, 2020, the Board of Directors agreed to increase the total offering amount and extend the period of its 2018 Offering
of 11% Senior Secured Notes. The total amount of the Offering has been increased to $2,500,000 and the offering period will continue
until terminated by the Board of Directors. Effective February 5, 2020 and March 3, 2020, the Company completed the sale of $60,000
and $100,000, respectively, of Units in the Offering. The sale of $100,000 Units on March 3, 2020 was to a related party.
In connection with the sale of the Units on February 5, 2020 and March 3, 2020, the Company issued 60,000 and 100,000, respectively,
cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021. Effective October 31, 2020 the Company
completed the exchange of $150,000 of Units in the Offering for matured Senior Unsecured notes. In connection with the exchange
of the Units effective October 31, 2020, the Company issued 150,000 cashless exercise warrants for purchase of company stock at
$0.50, expiring October 31, 2021. No fees or commissions were paid on the sale of the Units. The proceeds were used for general
working capital.
The
fair value of warrants issued in connection with the sales and exchanges of Units during the year ended December 31, 2020 was
$27,228 and was recorded as debt discount. Amortization expense related to the warrants was $75,025 and $72,777 during the
years ended December 31, 2020 and 2019, respectively.
The
value of the warrants issued to the note holders during the year ended December 31, 2020 was calculated using the Black-Scholes
pricing model using the following significant assumptions:
Volatility
|
|
|
115.2%
- 119.4
|
%
|
Risk-free Interest Rate
|
|
|
0.13%
- 1.45
|
%
|
Exercise Price
|
|
$
|
0.50
|
|
Fair Value of Common Stock
|
|
$
|
0.20
- $0.24
|
|
Expected Life
|
|
|
1.0
– 1.8 years
|
|
Mortgage
Loans and Lines of Credit Secured by Real Estate
Mortgage
loans and other debts such as lines of credit are collateralized by all assets of each nursing home property and an
assignment of its rents. Collateral for certain mortgage loans includes the personal guarantee of Christopher Brogdon, formerly
but no longer a related party, or corporate guarantees. Mortgage loans for the periods presented consisted of the following:
|
|
|
|
|
|
|
|
Total
Principle Outstanding as of
|
|
State
|
|
Number
of Properties
|
|
|
Total
Face Amount
|
|
|
12/31/2020
|
|
|
12/31/2019
|
|
Arkansas(1)
|
|
|
1
|
|
|
$
|
5,000,000
|
|
|
$
|
4,618,006
|
|
|
$
|
4,618,006
|
|
Georgia(2)
|
|
|
5
|
|
|
$
|
17,765,992
|
|
|
$
|
17,029,094
|
|
|
$
|
17,483,791
|
|
Ohio
|
|
|
1
|
|
|
$
|
3,000,000
|
|
|
$
|
2,798,000
|
|
|
$
|
2,869,200
|
|
Oklahoma(3)
|
|
|
6
|
|
|
$
|
12,378,599
|
|
|
$
|
11,575,699
|
|
|
$
|
9,305,540
|
|
|
|
|
13
|
|
|
$
|
38,144,591
|
|
|
$
|
36,020,799
|
|
|
$
|
34,276,537
|
|
(1)
|
The
mortgage loan collateralized by this property is 80% guaranteed by the USDA and requires an annual renewal fee payable in
the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year. Guarantors
under the mortgage loan include Christopher Brogdon. With our consent, Mr. Brogdon has assumed operations of the facility
and is making payment of interest on the loan.
|
(2)
|
In
2021, the Company has two mortgages maturing totaling $6,326,598. Management is actively working with our lenders to either,
refinance for better terms or extend these notes.
|
(3)
|
In
2021, the Company has three mortgages maturing totaling $2,609,331. As with our Georgia facilities, management is actively
working with our lenders to either refinance for better terms or extend the current note.
|
Subordinated,
Corporate, and Other Debt
Other
debt due at December 31, 2020 and 2019 includes unsecured notes payable issued to entities controlled by the Company used to facilitate
the acquisition of the nursing home properties.
|
|
|
|
|
Principal
Outstanding at
|
|
|
|
|
|
Property
|
|
Face
Amount
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
Stated
Interest Rate
|
|
Maturity
Date
|
Goodwill
Nursing Home (1)
|
|
$
|
2,030,000
|
|
|
$
|
741,000
|
|
|
$
|
1,386,000
|
|
|
13% (1)
Fixed
|
|
December 31, 2019
|
Goodwill
Nursing Home – Related Party (1)
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
150,000
|
|
|
13% (1) Fixed
|
|
December 31, 2019
|
Higher
Call Nursing Center (2)
|
|
|
150,000
|
|
|
|
125,394
|
|
|
|
-
|
|
|
8% Fixed
|
|
April 1, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,016,394
|
|
|
$
|
1,536,000
|
|
|
|
|
|
|
(1)
|
On
June 30, 2020, the Company purchased notes from four former investors in GWH Investors, LLC in favor of Goodwill Hunting,
LLC in the aggregate amount of $482,400 for $402,000 cash and recognized a gain of $80,400. On October 30, 2020, the Company
purchased from two more investors an aggregate amount of $108,000 for $90,000 of cash and recognized a gain of $18,000. On
November 20, 2020, the Company purchased from two additional investors an aggregate amount of $54,600 for $45,500 cash and
recognized a gain of $9,100.
|
|
(2)
|
In
connection with the acquisition of Higher Call, the Company executed a promissory note in favor of the Seller, Higher Call
Nursing Center, Inc., in the principal amount of $150,000 which accrues interest at the rate of 8% per annum and is payable
in equal monthly installments, principal and interest. This note is secured by a corporate guaranty of Global.
|
Our
corporate debt at December 31, 2020 and December 31, 2019 includes unsecured notes and notes secured by all assets of the Company
not serving as collateral for other notes.
|
|
|
|
|
Principal
Outstanding at
|
|
|
|
|
|
Series
|
|
Face
Amount
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
Stated
Interest Rate
|
|
Maturity
Date
|
10% Senior Secured Promissory
Note
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
10.0% Fixed
|
|
December 31, 2018
|
10% Senior Unsecured Promissory Notes
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
10.0% Fixed
|
|
October 31, 2020
|
11% Senior Secured Promissory Notes
|
|
|
1,670,000
|
|
|
|
1,670,000
|
|
|
|
1,460,000
|
|
|
11.0% Fixed
|
|
October 31, 2021
|
11% Senior Secured
Promissory Notes – Related Party
|
|
|
975,000
|
|
|
|
975,000
|
|
|
|
875,000
|
|
|
11.0% Fixed
|
|
October 31,
2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,670,000
|
|
|
$
|
2,660,000
|
|
|
|
|
|
Effective February 5, 2020 the Company completed the sale of $60,000 of
Units in the 11% Senior Secured Notes, and effective March 3, 2020 the Company completed the sale of $100,000 Units to a related
party. In connection with the sale of the Units on February 5, 2020 and March 3, 2020, the Company issued 60,000 and 100,000,
respectively, cashless exercise warrants for purchase of company stock at $0.50, expiring October 31, 2021.
On
September 30, 2020, the Company repaid $150,000 of 10% Senior Unsecured Notes that matured October 31, 2020. Effective
October 31, 2020, the Company exchanged $150,000 in outstanding Senior Unsecured 10% Notes and Warrants that had matured on October
31, 2020 for 11% Senior Secured Promissory Notes and issued 150,000 cashless exercise warrants for purchase of the Company’s
common stock at $0.50 per share, expiring October 31, 2021.
Paycheck
Protection Program Loans
On
April 20, 2020, the Company through its subsidiaries received a loan of $574,975 pursuant to the Paycheck Protection Program (the
“PPP Loan”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan
matures on April 20, 2022 (the “Maturity Date”), accrues interest at 1% per annum and may be prepaid in whole or in
part without penalty. No interest payments are due within the initial six months of the PPP Loan. The interest accrued during
the initial six-month period is due and payable, together with the principal, on the Maturity Date. The Company used all proceeds
from the PPP Loan to retain employees, maintain payroll and make lease and utility payments to support business continuity throughout
the COVID-19 pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act.
On
May 4, 2020, the Company through its subsidiaries received loans of $324,442 and $710,752 pursuant to the Paycheck Protection
Program (the “PPP Loans”) of the CARES Act. Both PPP Loans mature on May 4, 2022 (the “Maturity
Date”), accrue interest at 1% per annum and may be prepaid in whole or in part without penalty. No interest payments
are due within the initial six months of the PPP Loans. The interest accrued during the initial six-month period is due and
payable, together with the principal, on the Maturity Date. The Company used all proceeds from the PPP Loans to retain
employees, maintain payroll and make lease and utility payments to support business continuity throughout the COVID-19
pandemic, which amounts are eligible for forgiveness, subject to the provisions of the CARES Act. On November 19, 2020,
the Company received notice of forgiveness of the entire balance on two of its three loans obtained through the Paycheck
Protection Program (the “PPP Loans”) of the CARES Act. All requirements for loan forgiveness have been met
prior to December 31, 2020 for all three loans. The forgiveness for the loan balance of $574,975 was approved by the lender
and the Company is awaiting final forgiveness from the SBA.
The forgiveness
recognized during the year ended December 31, 2020 included
principal of $324,442, $574,975, and $710,752, as well as interest payable of $1,794, $4,017, and $3,869.
For
the years ended December 31, 2020 and 2019, the Company received proceeds from the issuance of debt of $3,365,448 and $1,801,718,
respectively. Proceeds from the issuance of debt in the year ended December 31, 2020 includes $100,000 from related parties. Cash
payments on debt totaled $1,352,300 and $538,534 for the years ended December 31, 2020 and 2019, respectively. Amortization expense
for deferred loan costs and debt discounts totaled $121,938 and $136,352 for the years ended December 31, 2020 and 2019,
respectively.
Future
maturities and principal payments of all notes and bonds payable listed above for the next five years and thereafter are as follows:
Years
|
|
|
|
2021
|
|
$
|
20,425,870
|
(1)
|
2022
|
|
|
547,052
|
|
2023
|
|
|
7,214,322
|
|
2024
|
|
|
381,508
|
|
2025
|
|
|
4,483,421
|
|
2026 and after
|
|
|
6,655,020
|
|
|
|
|
|
|
|
|
$
|
39,707,193
|
|
|
(1)
|
Any
note or bond that is not in compliance with all financial and non-financial covenants
is considered to have an immediate maturity, including those that require compliance
with covenants on any and all other notes. The notes secured by Meadowview,
Abbeville, and GL Nursing have covenants which were in technical non-compliance at
December 31, 2020, but the Company believes that its relationships with these lenders
are good.
|
6.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 10,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences
as may be determined by the Board of Directors.
Series
A Convertible Redeemable Preferred Stock
The
Company’s Board of Directors has authorized 2,000,000 shares of $2.00 stated value, Series A Preferred Stock. The preferred
stock has a senior liquidation preference value of $2.00 per share and does not bear dividends.
As
of December 31, 2020, and 2019, the Company has 200,500 shares of Series A Preferred Stock outstanding.
Series
D Convertible Preferred Stock
The
Company has established a class of preferred stock designated “Series D Convertible Preferred Stock” (Series D preferred
stock) and authorized an aggregate of 1,000,000 non-voting shares with a stated value of $1.00 per share. Holders of the Series
D preferred stock are entitled to receive dividends at the annual rate of 8% based on the stated value per share computed on the
basis of a 360-day year and twelve 30-day months. Dividends are cumulative, shall be declared quarterly, and are calculated from
the date of issue and payable on the 15th day of April, July, October, and January. The dividends may be paid, at the option
of the holder either in cash or by the issuance of shares of the Company’s common stock valued at the market price on the
dividend record date. Shares of the Series D preferred stock are redeemable at the Company’s option. At the option of the
holder, shares of the Series D preferred stock plus any declared and unpaid dividends are convertible to shares of the Company’s
common stock at a conversion rate of $1.00 per share.
As
of December 31, 2020, and 2019, the Company had 375,000 shares of Series D Preferred Stock outstanding.
For
years ended December 31, 2020 and 2019, the Company declared $30,000 in preferred dividends. During the years ended December 31,
2020 and 2019, the Company paid $30,000 and $30,000, respectively, for Series D preferred stock dividends. Dividends declared
of $7,500 were accrued as of December 31, 2020 and will be paid in 2021. Dividends declared of $7,500 were accrued as of December
31, 2019 and were paid in 2020.
Common
Stock
On
August 18, 2020, the Company’s Board of Directors approved the repurchase for redemption of 443,431 shares of the Company’s
$0.05 par value common stock (“Common Stock”) for $75,385, or $0.17 per share, in a privately negotiated transaction.
The redemption has been completed and the shares of Common Stock were cancelled.
On
November 13, 2020, the Company’s Board of Directors approved the repurchase for redemption of 104,715 shares of Common Stock
for $26,178, or $0.25 per share, in a privately negotiated transaction. The redemption has been completed and the shares of Common
Stock were cancelled.
On
December 9, 2020, the Company’s Board of Directors approved the repurchase for redemption of 60,000 shares of Common Stock
for $24,000, or $0.40 per share, in a privately negotiated transaction. The redemption and cancellation of these shares has not
yet been completed prior to December 31, 2020, nor as of date of filing.
The
Company issued 636,363 shares of common stock to directors and executive officers for compensation during 2019. The fair value
of the common stock issued for compensation was measured at the volume weighted average price of the Company’s common stock
for the ten trading days prior to issuance.
For
the years ended December 31, 2020 and 2019, the Company did not pay dividends on common stock.
Restricted
Stock Awards
The
following table summarizes the restricted stock unit activity during the years ended December 31:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested Restricted
Stock Units, Beginning
|
|
|
75,000
|
|
|
|
150,000
|
|
Granted
|
|
|
-
|
|
|
|
636,363
|
|
Vested
|
|
|
(75,000
|
)
|
|
|
(711,363
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding Non-Vested
Restricted Stock Units, Ending
|
|
|
-
|
|
|
|
75,000
|
|
In
connection with these director and executive restricted stock grants, the Company recognized stock-based compensation of $280,087
for the year ended December 31, 2019. No stock-based compensation expense was recognized for restricted stock grants for the year
ended December 31, 2020. However, during the year ended December 31, 2020, the Company recognized a reversal of stock-based compensation
of $8,750 due to forfeitures of restricted stock awards granted in the prior year.
Common
Stock Warrants
As
of December 31, 2020, and 2019, the Company had 2,708,130 and 2,598,130, respectively, of outstanding warrants to purchase common
stock at a weighted average exercise price of $0.50 and $0.54, respectively, and weighted average remaining term of 0.93 years
and 2.10 years, respectively. The aggregate intrinsic value of common stock warrants outstanding as of December 31, 2020 and 2019
was $82,680 and $0, respectively.
Activity
for the years ended December 31, 2020 and 2019 related to common stock warrants is as follows:
|
|
2020
|
|
|
2019
|
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
|
2,598,130
|
|
|
$
|
0.54
|
|
|
|
3,142,586
|
|
|
$
|
0.60
|
|
Issued
|
|
|
410,000
|
|
|
|
0.50
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(300,000
|
)
|
|
|
0.75
|
|
|
|
(544,456
|
)
|
|
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
2,708,130
|
|
|
$
|
0.50
|
|
|
|
2,598,130
|
|
|
$
|
0.54
|
|
Effective
January 28, 2020, the Company issued 100,000 warrants in connection with the exchange of outstanding Senior Secured 10% Notes
for 11% Senior Secured Promissory Notes. Effective February 5, 2020 and March 3, 2020, the Company issued 60,000 and 100,000 warrants,
respectively, in connection with sales of its 11% Senior Secured Notes. The 100,000 warrants issued on March 3, 2020 were to a
related party. Effective October 31, 2020, the Company issued 150,000 warrants in connection with the exchange of outstanding
Senior Unsecured 10% Notes for 11% Senior Secured Promissory Notes. See Note 5 for full disclosure of these transactions.
Common
Stock Options
As of
December 31, 2020, and December 31, 2019, the Company had 600,000 and 600,000, respectively, of outstanding options to
purchase common stock at a weighted average exercise price of $0.36, with a weighted average remaining term of 2.00 and
3.00 years, respectively. During the years ended December 31, 2020 and 2019, no options expired. The aggregate intrinsic
value of the common stock options outstanding at December 31, 2020 and 2019 was $102,000 and $0, respectively.
7.
RELATED PARTIES
Clifford
Neuman, a member of the Company’s Board of Directors, provided legal services to the Company. As of December 31, 2020,
and 2019, the Company owed Mr. Neuman for legal services rendered $9,900 and $32,156, respectively. As of September 2020,
the Company no longer uses office space provided by Mr. Neuman.
On
September 29, 2020, Zvi Rhine, the Company’s President and Chief Financial Officer and a member of the Board of Directors,
resigned from all positions with the Company. The resignations were prompted by regulatory issues not involving the Company or
its subsidiaries. Effective October 1, 2020, the Company entered into a consulting agreement with Mr. Rhine with a termination
date of December 31, 2020. In mid-December 2020, the Company advised Mr. Rhine that it would not be renewing his consulting agreement
beyond the termination date. The Company has discovered several matters involving a financial benefit undertaken by Mr. Rhine
that had previously been unknown by the other members of the Board and were unauthorized by the Company. The Company is doing
a thorough investigation into Mr. Rhine’s actions both as a former employee and subsequently as a consultant to determine
the full and exact nature and extent of any unauthorized conduct.
Creative
Cyberweb developed and maintained the Company’s website and is affiliated with Mr. Rhine’s family. The ongoing upkeep
paid by the Company was $450 per month. Effective December 17, 2020, the Company terminated its relationship with Creative Cyberweb
and Rhine and Associates. The Company’s website is being newly developed with an outside hosting and maintenance company
at a nominal cost.
In
January 2018, the Directors modified the Directors’ Compensation Plan to provide the annual grants be subject to ratable
vesting over 12 months. In March 2019, the Board approved an annual grant to three of its Directors without other compensation
plans, restricted stock awards of 90,909 shares each, subject to vesting. In July 2019, the Board approved a pro-rated annual
grant to two of its Directors without other compensation plans restricted stock awards of 90,909 shares in aggregate, subject
to vesting. In connection with these director restricted stock grants, the Company recognized stock-based compensation of $120,000
for the year ended December 31, 2019. No stock-based compensation expense was recognized in connection with director restricted
stock grants for the year ended December 31, 2020. However, the Company recognized a reversal of stock-based compensation of $8,750
during the year ended December 31, 2020 due to forfeitures of restricted stock awards granted in the prior year.
In
the first quarter of 2020, the Board revised the Director Compensation Plan to provide that non-employee directors are entitled
to a directors’ fee equal to $7,500 per quarter, payable in cash.
8.
FACILITY LEASES
The
following table summarizes our leasing arrangements related to the Company’s healthcare facilities at December 31, 2020:
Facility
|
|
Monthly
Lease Income (1)
|
|
|
Lease
Expiration
|
|
Renewal
Option if any
|
Eastman (2)
|
|
$
|
-
|
|
|
-
|
|
None
|
Warrenton
|
|
$
|
55,724
|
|
|
June 30, 2026
|
|
Term may be extended for
one additional ten-year term.
|
Goodwill (3)
|
|
$
|
48,125
|
|
|
February 1, 2027
|
|
Term may be extended for one additional
five-year term.
|
Edwards Redeemer (4)
|
|
$
|
-
|
|
|
-
|
|
None
|
Providence
|
|
$
|
42,519
|
|
|
June 30, 2026
|
|
Term may be extended for one additional
ten-year term.
|
Meadowview (5)
|
|
$
|
-
|
|
|
-
|
|
None
|
GL Nursing (6)
|
|
$
|
-
|
|
|
-
|
|
None
|
Glen Eagle (7)
|
|
$
|
-
|
|
|
-
|
|
None
|
Southern Hills SNF
(8)
|
|
$
|
-
|
|
|
-
|
|
None
|
Southern Hills ALF
(9)
|
|
$
|
-
|
|
|
-
|
|
None
|
Southern Hills ILF
(10)
|
|
$
|
-
|
|
|
-
|
|
None
|
Higher Call (11)
|
|
$
|
-
|
|
|
-
|
|
None
|
Fairland (12)
|
|
$
|
-
|
|
|
-
|
|
None
|
(1)
|
Monthly
lease income reflects rent income on a straight-line basis over, where applicable, the term of each lease.
|
(2)
|
On
October 18, 2019, the Company terminated the lease at its Eastman property. A Receivership was appointed to assume the operations
of the facility. The receivership was discharged on July 1, 2020 and the Company is currently operating the building independently.
|
(3)
|
The
lease became effective on February 1, 2017, and the facility began generating rental revenue thereafter.
|
(4)
|
Cadence,
our former lease operator, informed the Company that it intended to close the Edwards Redeemer facility due to unprofitable
operations. In violation of the operating lease, Cadence began moving patients from the facility and, as of October 18, 2019,
all patients had been removed. In response to our Petition, on October 17, 2019, the District Court of Oklahoma County, State
of Oklahoma issued a Temporary Order Appointing Receiver (the “Order”) pursuant to a Motion to Appoint Receiver
filed by Edwards Redeemer Property Holdings, LLC (“Edwards Property”), a wholly-owned subsidiary of the Company,
with respect as a skilled nursing facility. The Order was issued due to the violations by Cadence of the business-preservation
obligations contained in the lease between Edwards Property and the Operator. The facility opened on March 26, 2021 to be operated
by our newly formed wholly-owned subsidiary. During the year ended December 31, 2020 the Company recognized $150,000 in acquisition
related expenses from the receivership.
|
(5)
|
On
August 7, 2020, the facility was served with a Notice of Immediate Imposition of Remedies from the Centers for Medicare and Medicaid
Services (“CMS”), as well as a Notice of Imposition of Remedies by the Ohio Department of Health (“ODH”)
ordering the facility to relocate all residents no later than August 9, 2020. The actions of the CMS and ODH were the result of
ongoing operating deficiencies which the operator failed to cure. All residents of the Meadowview facility were relocated by the
August 9, 2020 deadline, and as a result the facility has been closed. A newly created wholly-owned subsidiary, Meadowview, has
applied with the ODH for a new nursing home license which is pending. In September 2020, the ODH served notice to the former operator
that it intended to commence proceedings to revoke the nursing license on the facility.
|
(6)
|
Effective
January 1, 2016, the GL Nursing facility was leased to another operator for a period of ten years at a monthly base rent of
$30,000 which was subject to increases based on census levels. Under the terms of the lease, the Company agreed to fund certain
capital expenditures, which it was unable to fulfill. In July 2016, the new tenant served notice that it was terminating the
lease effective August 31, 2016. The Company entered into a Lease Termination Agreement under which it paid the tenant $145,000
and is obligated to make future payments. Effective August 30, 2016, the Company entered into a new lease agreement with another
nursing home operator. The lease term was to commence at the end of a straddle period. During the straddle period, the Company
made working capital advances to enable the operator to cover cash flow deficits resulting from initial operations of the
facility. Prior to the end of the straddle period, the lease operator informed the Company that it would vacate the facility.
An entity affiliated with Mr. Brogdon, who is a guarantor of the mortgage, assumed operations of the facility in March 2018
under an OTA. Currently, this facility is not generating any income for the Company, all payments are being applied
to debt services, we are unsure if the facility will generate any future revenue for the Company.
|
(7)
|
The
Company entered into a management agreement to operate Glen Eagle after expending approximately $1.0 million in capital improvements.
The facility passed its licensure survey and began admitting patients in June 2018. Effective October 12, 2018, the facility
gained its certification and started collecting revenues from Medicare and Medicaid in April 2019. On October 17, 2019, the
Company terminated its management agreement with the former operator and a wholly-owned subsidiary is currently operating
the building independently.
|
(8)
|
In
May 2019, the lease expired, and in July 2019 the facility was leased to Southern Hills Rehab Center LLC, a wholly owned subsidiary
of the Company, to conduct operations. The approval of the transfer of the Certificates of Need and appropriate licenses to
operate the facility was granted on December 1, 2019. The Company is currently operating the building independently.
|
(9)
|
The
Company plans to operate the Southern Hills ALF independently once COVID-19 is brought under control.
|
(10)
|
The
Company has been operating the Southern Hills Independent Living Facility (ILF) directly since September 2019. The facility
does not provide healthcare services. It consists of private one- and two-bedroom units leased separately to individual tenants.
The rollout of the ILF has been slowed due to COVID-19.
|
(11)
|
On
March 1, 2020, the Company, through a wholly-owned subsidiary, completed its purchase transaction of the Higher Call property,
and commenced healthcare and related operations.
|
(12)
|
On
December 31, 2020 the Company, through a wholly-owned subsidiary, completed its purchase transaction of the Fairland property,
and commenced healthcare and related operations.
|
Lessees
are responsible for payment of insurance, taxes, and other charges while under the lease. Should the lessees not pay all such
charges as required under the leases, or if there is no tenant, the Company may become liable for such operating expenses. We
have been required to cover those expenses at Glen Eagle as well as the Southern Hills SNF, ALF and ILF, Meadowview, Higher Call,
Edwards, and Fairland properties.
Future
cash payments for rent to be received during the initial terms of the leases for the next five years and thereafter are as follows
(excludes Abbeville, Southern Tulsa SNF, Eastman, Higher Call, and Fairland due to properties being independently operated, as
well as Meadowview, Edwards Redeemer, Southern Tulsa ALF and ILF, Warrenton, Providence, and GL Nursing):
Years
|
|
|
|
|
|
|
|
2021
|
|
$
|
618,756
|
|
2022
|
|
|
626,808
|
|
2023
|
|
|
635,026
|
|
2024
|
|
|
643,401
|
|
2025
|
|
|
651,954
|
|
2026 and Thereafter
|
|
|
715,781
|
|
|
|
|
|
|
|
|
$
|
3,891,726
|
|
9.
INCOME TAXES
The
Company and its subsidiaries are subject to income taxes on income arising in, or derived from, the tax jurisdictions in which
they operate. The Company is current with all its federal and state tax filings. The Company is open to examination for tax years
2001 through 2020 due to the carry back of net operating losses.
The
following is a reconciliation of the federal statutory tax rate and the effective tax rate as a percentage for the years ended
December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Statutory Federal Income
Tax Rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Effect of Valuation
Allowance on Deferred Tax Assets
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
%
|
|
|
-
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The
components of deferred tax assets as of December 31, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net
Operating Loss Carryforwards
|
|
$
|
1,930,927
|
|
|
$
|
2,742,283
|
|
Capital Loss Carryforward
|
|
|
-
|
|
|
|
-
|
|
Impairment Loss
on Long Term Assets
|
|
|
327,600
|
|
|
|
327,600
|
|
Goodwill Impairment
|
|
|
595,154
|
|
|
|
595,154
|
|
Stock Based Compensation
|
|
|
31,387
|
|
|
|
428,408
|
|
Acquisition Costs
|
|
|
167,963
|
|
|
|
124,304
|
|
Other
|
|
|
618,072
|
|
|
|
254,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,671,103
|
|
|
|
4,472,581
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Bargain Purchase
Gain
|
|
|
(1,020,000
|
)
|
|
|
(1,020,000
|
)
|
Property and Equipment
|
|
|
(364,122
|
)
|
|
|
(352,701
|
)
|
Other
|
|
|
-
|
|
|
|
(107,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,384,122
|
)
|
|
|
(1,480,645
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
|
|
|
(2,286,981
|
)
|
|
|
(2,991,936
|
)
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
valuation allowance at December 31, 2020 and 2019 was primarily related to federal net operating loss carryforwards that, in the
judgment of management, are not more-likely-than-not to be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the
impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making
this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of
approximately $9.2 million prior to the expiration of the net operating loss carryforwards beginning in 2020. Estimated
taxable income for the year ended December 31, 2020 approximated $1.3 million. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management
believes it is more-likely-than-not that the Company will not realize the benefits of these deductible differences, net of the
existing valuation allowance at December 31, 2020.
When
more than a 50% change in ownership occurs, over a three-year period, as defined, the Tax Reform Act of 1986 limits the utilization
of net operating loss carry forwards in the years following the change in ownership. No determination has been made as of December
31, 2020, as to what implications, if any, there will be in the net operating loss carry forwards of the Company.
The
table presented below is a summary of changes in the fair value of the Company’s level 3 valuation for the warrant liability
for the years ended December 31, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Beginning Balance January 1
|
|
$
|
-
|
|
|
$
|
2,785
|
|
|
|
|
|
|
|
|
|
|
Change in Fair
Value of Warrant Liability
|
|
|
-
|
|
|
|
(2,785
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance, December 31
|
|
$
|
-
|
|
|
$
|
-
|
|
10.
GOODWILL
On
August 5, 2019, Southern Hills Rehab Center, LLC (“SHR”), a wholly-owned subsidiary of the Company, entered into an
Operations Transfer Agreement (the “OTA”) with C. David Rhoades, Court-Appointed Receiver (the “Receiver”).
Pursuant to terms of the OTA, SHR purchased the Operating Assets (as defined in the OTA) of Southern Hills Rehabilitation Center
in Tulsa, Oklahoma (“Southern Hills”) from the Receiver on December 1, 2019, the date on which SHR completed licensing
for Southern Hills. The purchase of the Operating Assets was accounted for as a business combination in accordance with ASC 805,
“Business Combinations”. The goodwill of $379,479 arising from the acquisition was assigned to the Company’s
Healthcare Services segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
The
following table summarizes the consideration paid and the amounts of the assets acquired, and liabilities assumed recognized at
the acquisition date.
Consideration
|
|
|
|
Write-off of note receivable
from the Receiver
|
|
$
|
750,000
|
|
Cash (to be paid subsequent to December
31, 2019 in equal monthly installments of $8,000 over 22 months)
|
|
|
176,000
|
|
Cash (paid in
advance)
|
|
|
24,000
|
|
Total consideration
|
|
|
950,000
|
|
|
|
|
|
|
Recognized amounts
of identifiable assets acquired, and liabilities assumed
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
39,831
|
|
Accounts Receivable
|
|
|
740,742
|
|
Property and Equipment
|
|
|
165,458
|
|
Prepaid Expenses and Other
|
|
|
710
|
|
Intangible Assets
|
|
|
42,185
|
|
Accounts Payable
and Accrued Liabilities
|
|
|
(418,405
|
)
|
Total identifiable
net assets
|
|
|
570,521
|
|
|
|
|
|
|
Goodwill
|
|
$
|
379,479
|
|
|
|
|
|
|
Acquisition-related
costs (included in the Company’s consolidated statement of operations for the year ended December 31, 2019)
|
|
$
|
62,882
|
|
The unaudited pro forma amounts of
SHR’s revenue and earning had the acquisition date been January 1, 2019 are as follows:
|
|
Revenue
|
|
|
Net
Income (Loss)
|
|
Actual from December 1, 2019 to December 31,
2019
|
|
$
|
526,787
|
|
|
$
|
(6,275
|
)
|
2019 supplemental pro forma from January 1, 2019 to December
31, 2019
|
|
|
13,005,638
|
|
|
|
(529,990
|
)
|
On
February 27, 2020, Global Eastman, LLC (“Global Eastman”), a newly-formed, wholly-owned subsidiary of the Company,
entered into an Operations Transfer Agreement (the “OTA”) with the court-appointed receiver of Eastman Healthcare
& Rehab, LLC. On July 2, 2020, the Superior Court of Dodge County, Georgia approved the OTA from the receiver to Global Eastman.
The OTA was made effective July 1, 2020, as that was the effective date of the nearly simultaneous issuance of operating license
from the State of Georgia. Pursuant to the terms of the OTA, Global Eastman assumed all cash accounts, building improvements and
equipment, and receivables and only selected critical ongoing liabilities associated with the prior operator. All other liabilities
remain with the prior operator in the former entity. The acquisition of the assets and assumption of liabilities was accounted
for as a business combination in accordance with ASC 805, “Business Combinations”. The goodwill of $697,429 arising
from the acquisition was assigned to the Company’s Healthcare Services segment. None of the goodwill recognized is expected
to be deductible for income tax purposes.
The
following table summarizes the amounts of the assets acquired and liabilities assumed recognized by the Company at the acquisition
date.
Recognized amounts of identifiable
assets acquired, and liabilities assumed
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
532,690
|
|
Accounts Receivable
|
|
|
544,117
|
|
Property and Equipment
|
|
|
232,801
|
|
Prepaid Expenses
|
|
|
16,706
|
|
Intangible Assets
|
|
|
19,013
|
|
Accounts Payable
and Accrued Liabilities
|
|
|
(2,042,756
|
)
|
Total identifiable
net liabilities
|
|
|
(697,429
|
)
|
|
|
|
|
|
Goodwill
|
|
$
|
697,429
|
|
|
|
|
|
|
Acquisition-related
costs (included in the Company’s consolidated statement of operations for the year ended December 31, 2020)
|
|
$
|
59,946
|
|
The unaudited pro forma amounts of
Global Eastman’s revenue and earnings had the acquisition date been January 1, 2019 and 2020 are as follows:
|
|
Revenue
|
|
|
Net
Income (Loss)
|
|
Actual from July 1, 2020 to December 31, 2020
|
|
$
|
3,609,944
|
|
|
$
|
811,503
|
|
2020 supplemental pro forma from January 1, 2020 to December
31, 2020
|
|
|
24,689,774
|
|
|
|
3,441,898
|
|
2019 supplemental pro forma from January 1, 2019 to December
31, 2019
|
|
|
12,761,912
|
|
|
|
(841,035
|
)
|
All
goodwill included in the consolidated balance sheets as of December 31, 2020 and 2019 has been assigned to the Healthcare Services
segment. Goodwill is tested for impairment at a reporting unit level on an annual basis or when an event occurs, or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the years ended
December 31, 2020 and 2019, the Company recorded no impairment of Goodwill.
Following
is a summary of Activities in goodwill for the years ended December 31, 2020 and 2019:
Balance, December 31, 2018
|
|
$
|
-
|
|
Goodwill
acquired in 2019
|
|
|
379,479
|
|
Balance, December 31, 2019
|
|
|
379,479
|
|
Goodwill
acquired in 2020
|
|
|
697,429
|
|
Balance, December
31, 2020
|
|
$
|
1,076,908
|
|
11.
ASSET ACQUISITIONS
Effective
March 2, 2020, the Company, through its newly formed wholly-owned subsidiary, Global Quapaw, LLC (“Quapaw”), completed
the acquisition of an 86-licensed bed, long-term care facility known as Higher Call Nursing Center (“Higher Call”)
located in Quapaw, Oklahoma for the purchase price of $1.3 million. Quapaw has entered into an operating lease agreement with
Global Higher Call Nursing, LLC, a wholly owned subsidiary of the Company, as lessee, to be the operator of the facility. The
acquisition represents the consummation of an Asset Purchase Agreement dated October 21, 2019 between Higher Call Nursing Center,
Inc., as Seller, and Quapaw, as Buyer. The purchase was accounted for as an asset acquisition in accordance with ASC 805. Accordingly,
on the acquisition date, the Company recorded property and equipment in the amount of $1.3 million in connection with the asset
acquisition which consists of the purchase consideration of $1.3 million and acquisition costs of $13,267. In connection with
the acquisition, the Company paid net cash of $1,045,767, relinquished a prepaid cash deposit of $117,500, and agreed to non-cash
owner financing debt of $150,000.
On
December 31, 2020, Global Fairland Property, LLC (“Global Fairland”), a newly-formed wholly-owned subsidiary of the
Company, completed the purchase of a skilled nursing facility, including the real estate and all furniture, fixtures, machinery,
and equipment, located in Fairland, Oklahoma consisting of 29 licensed beds and commonly known as “Family Care Center
of Fairland” (the “Fairland Facility”). The purchase price of the Fairland Facility was $796,650. With all broker,
loan origination fees, and closing costs included, the total purchase price was $858,060. The purchase of the Fairland Facility
was accounted for as an asset acquisition in accordance with ASC 805 whereby, on the acquisition date, the Company recorded property
and equipment in the amount of $858,060.
In
connection with the acquisition of the Fairland Facility, the Company partially financed the acquisition with a conventional mortgage
loan and executed a promissory note in favor of Simmons Bank in the principal amount of $784,000. The note bears interest at an
annual rate of 4.45% and matures on December 30, 2025. The note is secured by a Mortgage covering the Fairland Facility and a
UCC Security Interest covering the personal property and other non-real estate assets. The remainder of the purchase price of
$74,060 was paid with cash.
As
of December 31, 2020, the Fairland Facility is operated by another wholly-owned subsidiary under an operating lease because
of the concurrent completion of an Operations Transfer Agreement with the former operator.
12.
SEGMENT REPORTING
The
Company had two primary reporting segments during the years ended December 31, 2020 and 2019, which include real estate services
and healthcare services. The Company reports segment information based on the “management approach” defined in ASC
280, Segment Reporting. The management approach designates the internal reporting used by management for making decisions
and assessing performance as the source of our reportable segments.
Total
assets for the healthcare services and real estate services segments were $11,859,440 and $34,073,043, respectively, as
of December 31, 2020 and $4,654,845 and $35,223,318, respectively, as of December 31, 2019.
|
|
Statements
of Operations Items for the Year Ended
|
|
|
|
December
31, 2020
|
|
|
December
31, 2019
|
|
|
|
Real
Estate
Services
|
|
|
Healthcare
Services
|
|
|
Consolidated
|
|
|
Real
Estate Services
|
|
|
Healthcare
Services
|
|
|
Consolidated
|
|
Rental Revenue
|
|
$
|
2,112,459
|
|
|
$
|
-
|
|
|
$
|
2,112,459
|
|
|
$
|
3,267,644
|
|
|
$
|
-
|
|
|
$
|
3,267,644
|
|
Healthcare Revenue
|
|
|
-
|
|
|
|
18,816,239
|
|
|
|
18,816,239
|
|
|
|
-
|
|
|
|
3,662,344
|
|
|
|
3,662,344
|
|
Total Revenue
|
|
|
2,112,459
|
|
|
|
18,816,239
|
|
|
|
20,928,698
|
|
|
|
3,267,644
|
|
|
|
3,662,344
|
|
|
|
6,929,988
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
866,787
|
|
|
|
1,221,935
|
|
|
|
2,088,722
|
|
|
|
820,822
|
|
|
|
477,771
|
|
|
|
1,298,593
|
|
Property Taxes, Insurance and Other
Operating
|
|
|
580,265
|
|
|
|
12,804,057
|
|
|
|
13,384,322
|
|
|
|
203,854
|
|
|
|
2,556,373
|
|
|
|
2,760,227
|
|
Provision for Bad Debt
|
|
|
-
|
|
|
|
292,529
|
|
|
|
292,529
|
|
|
|
152,224
|
|
|
|
3,609
|
|
|
|
155,833
|
|
Acquisition Costs
|
|
|
207,899
|
|
|
|
-
|
|
|
|
207,899
|
|
|
|
24,073
|
|
|
|
38,809
|
|
|
|
62,882
|
|
Depreciation
and Amortization
|
|
|
1,343,109
|
|
|
|
237,191
|
|
|
|
1,580,300
|
|
|
|
1,197,402
|
|
|
|
154,408
|
|
|
|
1,351,810
|
|
Total Expenses
|
|
|
2,998,060
|
|
|
|
14,555,712
|
|
|
|
17,553,772
|
|
|
|
2,398,375
|
|
|
|
3,230,970
|
|
|
|
5,629,345
|
|
Income
from Operations
|
|
|
(885,601
|
)
|
|
|
4,260,527
|
|
|
|
3,374,926
|
|
|
|
869,269
|
|
|
|
431,374
|
|
|
|
1,300,643
|
|
Other (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Warrant Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,785
|
)
|
|
|
-
|
|
|
|
(2,785
|
)
|
Gain on Extinguishment of Debt
|
|
|
(107,500
|
)
|
|
|
(1,619,849
|
)
|
|
|
(1,727,349
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on Sale of Investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,069
|
)
|
|
|
-
|
|
|
|
(1,069
|
)
|
Gain on Proceeds from Insurance Claim
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(158,161
|
)
|
|
|
-
|
|
|
|
(158,161
|
)
|
Loss on Write-off of Note Receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,000
|
|
|
|
-
|
|
|
|
250,000
|
|
Interest Income
|
|
|
(465
|
)
|
|
|
-
|
|
|
|
(465
|
)
|
|
|
(56,012
|
)
|
|
|
-
|
|
|
|
(56,012
|
)
|
Interest Expense
|
|
|
1,905,571
|
|
|
|
234,795
|
|
|
|
2,140,366
|
|
|
|
1,959,853
|
|
|
|
176,848
|
|
|
|
2,136,701
|
|
Total Other (Income)
Expense
|
|
|
1,797,606
|
|
|
|
(1,385,054
|
)
|
|
|
412,552
|
|
|
|
1,991,826
|
|
|
|
176,848
|
|
|
|
2,168,674
|
|
Net Income (Loss)
|
|
|
(2,683,207
|
)
|
|
|
5,645,581
|
|
|
|
2,962,374
|
|
|
|
(1,122,557
|
)
|
|
|
254,526
|
|
|
|
(868,031
|
)
|
Net (Income)
Loss Attributable to Noncontrolling Interests
|
|
|
(6,554
|
)
|
|
|
-
|
|
|
|
(6,554
|
)
|
|
|
6,417
|
|
|
|
-
|
|
|
|
6,417
|
|
Net
Income (Loss) Attributable to Global Healthcare REIT, Inc.
|
|
$
|
(2,689,761
|
)
|
|
$
|
5,645,581
|
|
|
$
|
2,955,820
|
|
|
$
|
(1,116,140
|
)
|
|
$
|
254,526
|
|
|
$
|
(861,614
|
)
|
13.
LEGAL PROCEEDINGS
The
Company and/or its affiliated subsidiaries are or were involved in the following litigation:
Bailey
v. GL Nursing, LLC, et. al in the Circuit Court of Lonoke County, Arkansas, 23rd Circuit, 43CV-19-151.
In
April 2019, the Company’s wholly-owned subsidiary was named as a co-defendant in the action arising out of a claimed personal
injury suffered by the plaintiff while a resident of the skilled nursing home owned, but not operated, by GL Nursing. As of this
date, we have engaged legal counsel, but no further information is known regarding the merits of the claim. After initial inquiry,
it does not appear that the lease operator of the facility had in effect general liability insurance covering the GL Nursing,
as landlord, as required by the operating lease.
As
we simply were the owners of the property and not the operators, we believe that primary responsibility, if any, falls with the
operator at the time. Under the terms of the lease, the operator has a duty to indemnify the Company, a claim which we intend
to assert.
While
it is too early to assess the Company’s exposure, we believe at this time that the likelihood of an adverse outcome is remote.
Thomas
v. Edwards Redeemer Property Holdings, LLC, et.al., District Court for Oklahoma County, Oklahoma, Case No. CJ 2016-2160.
This
action arises from a personal injury claim brought by heirs of a former resident of our Edwards Redeemer facility, filed in April
2016. We are entitled to indemnification from the lease operator and should be covered under the lease operator’s general
liability policy. As we are not the operators of the facility and believe we have indemnity coverage, we believe we have no exposure.
The lease operator’s insurance carrier is providing a defense and indemnity and, as a result, we believe the likelihood
of a material adverse result is remote.
Edwards
Redeemer Property Holdings LLC v. Edwards Redeemer Healthcare & Rehab, LLC, District Court of Oklahoma County, State of
Oklahoma, Case No. CJ-19-5883.
This
action was brought by us against the former lease operator for breaching the lease agreement, removing all the patients, and closing
the facility. On October 17, 2019, the Court entered an Order Appointing a Receiver. We have entered into a Settlement Agreement
and Release with the Receiver and an Operations Transfer Agreement pursuant to which out newly formed subsidiary will acquire
the assets and operations of the facility. While awaiting Court approval of those two agreements, we have been completing extensive
remodeling of the facility.
Dodge
NH, LLC v. Eastman Healthcare & Rehab, LLC, Superior Court of Dodge County, State of Georgia, File No. 19V-8716.
This
action was brought by us against the former lease operator for numerous violations of the operating lease, including violation
of the cross-default provisions with Edwards Redeemer, which had been operated by an affiliate of the Eastman operator. We also
served a Notice of Termination with respect to the operating lease. On October 18, 2019, the Court entered an Order granting to
us a Temporary Restraining Order requiring the lease operator to maintain the status quo of the facility. On November 21, 2019,
the prior Temporary Restraining Order was superseded by an Order Appointing Receiver requested by the Company’s subsidiary
Dodge NH, LLC. Under the Order, a Receiver designated by us and approved by the Court will oversee the operations at the facility.
This Order will mitigate any potential disruption to the facility’s ongoing operations in light of the various disputes
between the Company and the former operator, Eastman Healthcare & Rehab LLC, an affiliate of Cadence Healthcare Solutions,
LLC. On January 15, 2020, the Receiver filed a Motion for the Court to authorize the Receiver to negotiate an Operations Transfer
Agreement with the Company, which Motion was granted. On July 2, 2020, the court approved the Operations Transfer Agreement (“OTA”)
from the receiver to Global Eastman, LLC, newly formed subsidiary of the Company. Nearly simultaneously Global Eastman, LLC secured
an operating license from the state with an effective date of July 1, 2020. Pursuant to the terms of the OTA, Global Eastman has
assumed all operations associated with the prior operator, and the matter is essentially resolved in all material respects.
Village
of Seville v. High Street Nursing, LLC, Wadsworth Municipal Court, State of Ohio, Case No 20-CRB-58.
This
is an action filed March 2020 for sanctions against our subsidiary arising from a claimed nuisance activity (assaults on patients)
at the skilled nursing facility. As we lease the facility to an operator, we have retained an attorney and entered a plea of Not
Guilty. We are the landlord and do not believe we have any liability in this matter. The action was subsequently dismissed without
prejudice.
Cadence
Healthcare Solutions, LLC.
We
received a demand letter in February 2020 from an attorney representing Cadence Healthcare Solutions, LLC (“Cadence”)
claiming unpaid management fees incurred at our Glen Eagle Healthcare facility in Abbeville, Georgia. Cadence is the same manager
that is involved in the matters related to Edwards Redeemer in Oklahoma City and Eastman in Eastman, Georgia, as Cadence was the
manager in all three facilities until it was terminated in Q4 2019. We believe we have significant defenses and offsets to this
claim and intend to defend vigorously. We believe the likelihood of a material adverse outcome is remote.
Oliphant
v. Global Eastman, LLC, et.al., State Court of Cobb County, State of Georgia, Civil Action No. 20-A-3983
This
is a personal injury lawsuit against various defendants arising out of the death of a patient of the Eastman Healthcare &
Rehab Center (the “Facility”). At all relevant times, the Facility was owned by the Company’s wholly owned subsidiary
Dodge NH, LLC and leased to Eastman Health & Rehab LLC, an affiliate of Cadence Healthcare, as lease operator. Neither the
Company nor any affiliate of the Company had any involvement in patient care at the time of the incident for which complaint was
made. The Company relies upon well-settled Georgia law that a landlord has no liability for patient care. The landlord is Dodge
NH, LLC. Global Eastman, LLC was not formed as a legal entity during the period of the incident and did not assume the past liabilities
as part of the OTA with the receivership of Eastman Healthcare & Rehab LLC which was effective July 1, 2020. Global Eastman
LLC was formed on November 21, 2019. We strongly deny any liability and intend to vigorously defend. We believe that the likelihood
of a material adverse outcome is remote.
In
the matter of Austin.
On
December 23, 2020, we received written notice from an attorney of the intent to assert an action for damages against Dodge NH,
LLC, which is our subsidiary that owns the nursing facility in Eastman Georgia. The action arises from the shooting death outside
of the facility of a woman that worked for our cleaning contractor that cleaned the nursing home. The woman was shot by her former
boyfriend who then committed suicide. The incident occurred in December 2019 when the facility was operated by a third-party operator
who was in receivership. We do not believe there is any basis in law or fact to hold the owner of the real estate liable,
and as a result management has concluded that the likelihood of a material adverse result is remote.
In re: Providence HR, LLC v. CRM of
Warrenton, LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50201
In re: ALT/WARR, LLC v. CRM of Sparta,
LLC, United States Bankruptcy Court, Middle District of Georgia, Macon Division, Case No. 21-50200
These are companion cases arising out of
the Company’s election to terminate the operating leases on the Company’s two facilities in Warrenton and Sparta,
Georgia. The Company served a Notice of Termination on each facility and in response the lease operators filed voluntary petitions
under Chapter 11 of the US Bankruptcy Code. The Company filed Motions for Relief from Stay which was heard by the Court on March
22, 2021. By Order of the Court, the hearing was continued to May 25, 2021. The Court entered an interim Order requiring the lease
operators to comply with their leases, including payment of rent, pending the next hearing. A Status Conference is scheduled for
May 13, 2021.
14.
SUBSEQUENT EVENTS
Effective
January 1, 2021, Christopher “Randy” Barker has been appointed as President and COO of the Company and will also serve
as a member of its Board of Directors. Mr. Barker will replace Lance Baller who had been acting as the Company’s Interim
President. In consideration of services rendered as President and COO of the Company, Mr. Barker shall be paid an annual salary
of $125,000.
Effective
January 1, 2021, Lance Baller resigned as Interim President of the Company but will remain as CEO and has also been appointed
to serve as the Company’s Chairman of the Board. In consideration of services rendered as CEO of the Company, Mr. Baller
shall be paid an annual salary of $125,000.
The
Company has been a party to two operating leases covering its skilled nursing homes located in Warrenton, Georgia and Sparta,
Georgia. The tenant entities under these two leases are affiliates of the same individual professional operator. Effective January
27, 2021, the Company served a Notice of Termination
under both of the foregoing leases. The Notice
of Termination was based upon numerous events of default under both leases, including the tenant’s failure to pay required
taxes which have been accruing. The Company expects both tenants to dispute the existence of events of default and object to the
termination of the leases. There can be no assurance how these matters will be resolved. See Legal Proceedings above.
On
January 28, 2021, the Company received the second round of PPP through the CARES Act. The Company
was issued $675,598 for the Southern Hills IL facility. As with previous rounds, the Company intends to use the funds for
payroll and plans to apply for forgiveness once the funds are exhausted in the second quarter of 2021.